The first thing I noticed when I heard the news about the SNB and read the issued statement to end the peg to 1.20 euro was lack of some nominal target to replace the peg. When the SNB decided to peg to a certain exchange rate, it effectively abandoned its inflation target. One might assume that the SNB will resume with its prior inflation target, but it does not explicitly say so in the announcement. Thus, it’s a rather curious kind of situation that, judging by the reaction in Forex, probably had different results than intended. But I don’t have enough information about the current circumstances of the Swiss economy to know whether the appreciation of the Swiss Franc is bad, good, or somewhere in between and I don’t want to be in the position of reasoning from a price change.
Nevertheless, I can speculate about why the SNB might have done this and there are two factors that I think play into it.
The first point is the topic of the legal wrangling over the ECB’s OMT program. I worked on a post about that last night and had planned to have something about that legal battle posted this week. But the long and short of it is that there was a preliminary opinion released two days ago by the European Court of Justice to the effect that the OMT program would not amount to financing governments if the primary objective was ensuring that the ECB would meet its mandates set out by treaty. In other words, programs like OMT and QE are permissible if they are used to ensure EZ price stability and are carried out in non-primary markets.
This legal battle has been seen as a key roadblock to the ECB’s implementation of QE that has been discussed for months. Though the opinion released on the 13th is not the final ruling in the matter, it has been said that the preliminary opinion is a recommendation that is generally followed by the court. In addition, Mr. Weidmann is not voting on policy actions this quarter, a development that probably spurred the release of the preliminary opinion ahead of the final ruling that is expected in about six months in order to start the QE program while Mr. Weidmann cannot veto it (the votes must be unanimous). And so, while not certain, it looks like conditions for the ECB to begin QE later this month have dramatically improved.
If the implementation of QE in the EZ looks more certain to the policymakers on the SNB, the 1.20 euro peg may no longer appear to be a rational target. Again, I do not know which data they are looking at or what their plans are post-peg. But I think it is part of a larger picture that has yet to come into focus, and any mass of appreciation the Swiss franc might experience over the next couple of weeks is likely to be, as far as I can tell, temporary.