“Shock” and “awe.”
It’s been a busy two weeks for markets, particularly currency markets, with the Swiss National Bank abandoning its peg against the euro and the European Central Bank’s quantitative easing announcement causing huge volatility.
In an email on Friday, analysts at Deutsche Bank noted that the ECB’s QE program is significantly larger than the SNB program that kept the franc pegged at 1.20 against the euro, but the market reaction to the SNB’s announcement was significantly larger.
Because the SNB surprised the market, and nothing makes markets move like getting caught off guard.
From Deutsche Bank:
Eurozone QE: Impressive yes, but Mr. Draghi’s trillion euro announcement was not even the eurozone’s biggest monetary policy easing measure of the last several days. Why? Take currency moves — an important policy transmission channel — as a yardstick for measuring impact. In trade-weighted terms the euro weakened 1.7 per cent on Friday, a big fall but less than the 2 per cent depreciation in the single currency after the Swiss National Bank’s bombshell last Thursday. The SNB action also shifted gold prices higher by four times as much as the ECB’s announcement, while eurozone stocks rose by a similar magnitude following both central bank moves. The ECB will buy more assets every fortnight than the SNB added to its balance sheet during the last year. And yet the SNB delivered a more exaggerated market reaction. Shock and awe remains a powerful weapon indeed.