Swiss National Bank Shocks the World (STA BREAKING NEWS and ARCHIVES)

by Theresa , Thursday, January 15, 2015, 10:11

The road to normal is proving to be bumpy.

Stunning monetary-policy shifts in Switzerland and India sent markets on wild rides, highlighting Federal Reserve Chair Janet Yellen’s November warning that “normalization could lead to some heightened financial volatility.”

Following today’s wake-up calls, the Swiss franc surged as much as 27 percent against the dollar, moving more like the Nigerian naira and the Ukrainian hryvnia than the seventh- largest reserve currency. Mumbai’s benchmark stock index posted its biggest gain in more than a year.

In India, Reserve Bank Governor Raghuram Rajan cut his key interest rate for the first time in 20 months. Six hours later, Swiss National Bank President Thomas

Jordan abandoned a three- year-old cap on the franc’s gains. Both decisions were unscheduled and, in Switzerland’s case, unexpected.

The lessons for investors: central banks are no longer aligned and again a source of volatility rather than calm in financial markets. Also, forward guidance has its limits as policy can shift abruptly when economic conditions change and officials still like the odd surprise.

The risks were emerging even before today. Investors are bracing for the first U.S. interest rate increase since 2006 and the European Central Bank is set to decide it will buy government bonds for the first time. The euro has weakened 14 percent the past year against the dollar on the back of the divergence trade.

Before that came the “taper tantrum,” when hints of tightening from the Fed in 2013 roiled bond markets worldwide.

Ceiling Dismantled

Jordan dismantled the franc’s 1.20 per euro ceiling a week before the ECB’s expected announcement of quantitative easing. That move would intensify upward pressure on his currency, rendering the cap untenably expensive. Rajan acted after a weakening of inflation gave him room to support an economy growing half the pace of four years ago.

FULL STORY