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Draghi did not come up with the awaited surprise
The ECB cut the deposit rate by 10bp from -0.2% to -0.30%. The consensus was for 10bp, but the interest rate market was pricing a 14.5bp deposit rate cut. So rather disappointing on that front. The ECB will also extend its QE program by 6 months to at least March 2017. The program will remain open ended. The market however was also expecting an increase of the purchasing power from 60B/month to 70B. Clearly investors who were used to a history of Draghi over-delivering are disappointed, which is leading equity markets lower and the Euro higher.
Nevertheless, the 6 months extension of its QE program represents 360B euros, which is not insignificant, and should be supportive for the equity markets over the longer run. The increased interest rate differential will also continue weight on the common currency going forward. Moreover, Draghi still has some ammunition to increase its QE program at a later stage.
What it means for the SNB and the Franc?
As we have seen earlier this week with GDP and retail sales figures, the Swiss economy remains gloomy mainly as exports continue to suffer from the strong Franc. While negative rates have helped the Swiss currency to weaken back close to pre-floor levels versus the dollar, the pound or even the Chinese renminbi; the priority for the SNB remains on the EUR/CHF, which is still a good 7% below the former 1.20 floor.
The ECB move is obviously pressuring the SNB to duplicate the measures at its next meeting on December 10th. Jordan already prepared the market over the past weeks, saying that the bank needs to keep an interest rate differential in order to weaken CHF. Negative rates also seemed more effective than FX interventions, as it kept investors looking for safe-haven at bay. Hence, we should expect further rate cuts from the SNB; the first one most likely coming in 1 week or before. To maintain the differential Jordan would need a cut by at least 10 bp from - 0.75% to -0.85%.