Capital outflow from Russia spilled to the Switzerland, pushed Swiss Franc higher and pressured Sweizerische Nationalbank (SNB) to introduce negative interest rate on deposits.The decision tipped market players of the possibility of a significant move by ECB in January and the strength of US Dollar in the coming months.

Crisis in Russia that was marked by Ruble downfall have disrupted market prices for other currencies, particularly Swiss Franc. Capital outflow from Russia spilled to the Switzerland, pushed Swiss Franc higher and pressured Sweizerische Nationalbank (SNB) to introduce negative interest rate on deposits. On the other hand, the decision tipped market players of the possibility of a significant move by ECB in January and the strength of US Dollar in the coming months.

Suku
Negative deposit rates have repeatedly implemented in Europe in the last few years with various reasons. From the first time it was done by Swedia, then by the European Central Bank (ECB), Denmark, and now Swiss.

Central bank is commercial bank's bank, so negative deposit rates mean that commercial bank savings in the central bank from time to time will be decreased instead of increased. It does not necessarily mean that commercial banks will extend negative rates to clients as well. In fact, banks in Denmark are avoiding it because if they did it then customers will flee. Although SNB negative rates is aimed to bring demands on CHF down and possibly will backfire on its banking system, but it will not directly influence the people. At the same time, SNB negative rates is being considered as a tipping hand that points to the timing of ECB Quantitative Easing.

SNB Negative Rates

Yesterday (18/12), SNB suddenly announced their intention to apply negative interest rates on deposit. Starting from January 22, 2015, Swiss banks will be burdened by -0.25% rate on their savings in the central bank. The step was taken to respond to chaos in Russian economy that has pushed Swiss bank's liquidity higher.

Swiss is well-known for its fiscal strength and strict bank secrecy, so it is frequently becoming safe haven in times of crisis, including the current crisis in Russia. Investors immediately moved their assets to Swiss once Rubel crashed, thus pushed Swiss Franc higher than its fundamentally reasonable levels. Meanwhile, stronger Swiss Franc threaten Swiss exports and could possibly throw Swiss into deflation. Consequently, the SNB decided to introduce negative deposit rates.

Bank

Over the past few days, a number of factors have prompted increased demand for safe investments, according to SNB as quoted by New York Times, The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate.

As soon as the announcement released, USD/CHF and EUR/CHF skyrocketed to new height. However, it does not guarantee that CHF pairs will be devoid of correction, because as a 'safe haven', CHF will continue to be one investors seek at crises. If the implementation of negative interest rates failed to halt Swissy appreciation, then SNB is expected to intervene by buying Euro.

ECB Quantitative Easing

For different reason, ECB have cut its deposit rates below zero in June 2014. ECB wanted to herd liquidity out of its safes and trickle down on investments and lending in Eurozone countries, thereby reignite the sluggish economy. But the move failed to spur investmensts, and ECB is pressured to launch its own brand of Quantitative Easing (QE). Even so, ECB seems reluctant, and till the last ECB meeting earlier this month, its chief kept refusing to commit.

Following SNB negative rates, speculation that ECB will announce QE soon became rife. Furthermore, effective date of SNB negative rates will fall on January 22, 2015, the exact date of first ECB meetings in 2015. Quoted by WSJ,  Aurelija Augulyte from Nordea said, It is a bit unusual the SNB did (it) a week after they held the meeting, and knowing what the ECB could be up to. I think they have seen intensifying pressure on the floor due to the Russian capital flow, and acted now primarily due to it.  That said, the negative rate is effective January 22 which is exactly the date of the ECB meeting where they could introduce QE. Maybe SNB knows something we don't know yet?

It needs to be noted that if ECB launch QE while SNB rates stay positive, then Swiss will be overflowed with liquidity once again and place Swiss Franc on a sure course to appreciation. By implementing negative deposit rate before or at the same time with ECB QE, SNB might mean for it to prevent such happening. This is why analyst suspect SNB action as an indication that ECB might announce QE on the upcoming 22 January 2015.

Sharper Policy Divergence

Along with the increasingly worrying Russian crisis, it is not only Swiss that got dumped with a lot of funds. Yields on US treasuries are reportedly increasing, and stocks have climbed higher. On the heels of Ukraina-related sanctions, direct economy relations between Russia with Europe and the USD have diminished, but it does not necessarily cut into the funds movements between countries. In other words, Russian crisis has became another drive that support stronger US Dollar.PelarianRussia capital outflow since 2006. Outflow to the CIS is high due to remittance, so highest significant capital outflow could be detected to China, Swiss, and the US (blue bars).

Apart from that, SNB negative rates once again reminds the market of policy divergence among world leading central banks. While SNB staunchly defends exchange rate to no more than 1.20 CHF per Euro, The Fed is expected to hike interest rates in order to fish investments back to the US. With this, the difference between the tightening of monetary policy in the US with easing in Europe, Japan, and Switzerland became increasingly striking, and continue to push the US dollar to step up even higher.

Fed rate hike will be the highlight of financial market trades in 2015. The Fed Federal Open Meeting Commitee (FOMC) on Thursday (18/12) have replaced considerable time with patience, so analysts firmly estimate US the Fed rate hike to be started in mid-2015, certainly after the first quarter, but no later than September.