[LONDON] Major banks were re-examining their already weak forecasts for the euro against the dollar on Thursday to factor in the Swiss National Bank's abandonment of its three-year-old franc ceiling.
Morgan Stanley, Deutsche Bank and Societe Generale were among those to issue sell recommendations on the euro in the aftermath of a morning of turmoil on markets that generated millions of dollars in losses for some.
Nikolaos Sgouropoulous, a G10 FX strategist at Barclays in London, said the British bank would wait until next week's ECB meeting before deciding whether to revise down its euro forecast of US$1.07 by year-end. "There are elevated risks to the downside, even from our currently very bearish forecasts," Sgouropoulous said. "We very rarely revise forecasts on the back of some announcement - it would have to be big, and today was big." Alvin Tan, a currency strategist at Societe Generale in London, said the bank would be revising down its euro/dollar forecast - currently US$1.14 by the end of the year - in the wake of the SNB's move.
Zurich's scrapping of the cap sent the franc spinning higher across the board against the yen, dollar and euro. But it was widely expected to be the euro, which lost as much as 30 per cent against the franc, that feels the most pain over the longer term.
Traders say the SNB had been one of the few reliable global supports for Europe's common currency, a significant buyer in what has otherwise been a six-month slide that has knocked 20 US cents off its value against the dollar. "The biggest euro buyer in the market is gone," said Susanne Galler, FX strategist at Jefferies. "The share of euro in the SNB's FX reserve allocation is 45 per cent, which will have risen in the recent absorption of euro/Swiss franc, so they are likely to remain euro cross sellers for a while longer. Net-net this is not a euro positive." But of as much importance may be the message markets have taken from the SNB about the broader fate of the euro.
The European Central Bank is preparing to deliver outright quantitative easing - effectively the printing of euros - with a move widely expected at its policy meeting next week. "There is speculation in the market that the SNB is getting ahead of the ECB, that they know something is going to happen next week," said Tan at Societe Generale in London.