Publication date: 5 February 2015 | Covering: January 2015
Monthly Briefing
- SNB shock January 15: Swiss National Bank removes EUR/CHF floor; Swiss franc surges 20%+ intraday; global currency markets roiled
- ECB January 22: Draghi announces €60 billion/month QE from March; euro near US$1.12; government bond yields collapse across Europe
- FRESH — Greece: SYRIZA wins January 25 election; PM Tsipras demands debt renegotiation (11 days ago)
- Fed December 2014: Replaced “considerable time” with “patient”; 2015 liftoff expected; January meeting watches carefully
- Oil: Brent falls to US$45–50/barrel; OPEC holds production; US shale under severe pressure
- Jamaica IMF EFF; BOJ easing; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
SNB Shock: Swiss Franc Peg Abandoned
The most dramatic single market event of January 2015 came on 15 January, when the Swiss National Bank abruptly and without warning abandoned the EUR/CHF exchange rate floor of 1.20 that it had maintained since September 2011. The SNB’s floor had been introduced at the height of the eurozone debt crisis to prevent the safe-haven Swiss franc from appreciating to levels that would devastate Swiss exporters and the tourism industry. The removal of the floor — which the SNB had consistently described as a cornerstone of its monetary policy as recently as January 12 — sent the franc surging by more than 20 per cent against the euro in intraday trading, the largest one-day move in a major currency in living memory. The SNB simultaneously cut its deposit rate further into negative territory to minus 0.75 per cent. The decision was widely attributed to the SNB’s calculation that defending the peg would become untenable once the ECB launched its widely anticipated quantitative easing programme, which would require the SNB to buy unlimited quantities of euros to hold the floor. The fallout was immediate: several foreign exchange brokers suffered catastrophic losses, and currency funds with short franc positions were severely damaged. For global mortgage markets, the event was a stark reminder of the risks embedded in apparently stable exchange rate regimes.
ECB Announces Quantitative Easing; Euro Slides
European Central Bank President Mario Draghi delivered on 22 January what markets had long anticipated: the announcement of a comprehensive government bond purchase programme, to begin in March at a pace of €60 billion per month in sovereign bonds and agency debt. The programme would run until at least September 2016. The announcement exceeded market expectations in its scale and open-ended commitment, sending European equity markets sharply higher and the euro lower. The EUR/USD rate fell from above US$1.18 at the start of January to below US$1.15 immediately after the announcement, and was approaching US$1.12 by the time this edition went to print. European government bond yields collapsed across the board: German 10-year Bund yields fell to around 0.30 per cent, and several shorter-dated European sovereign bonds were trading at outright negative yields. Draghi framed QE as necessary to counter deflation risks — eurozone CPI had turned negative on a year-on-year basis in December — and insufficient credit transmission through the banking system. For Jamaica and Caribbean economies with dollar-linked exchange rates, ECB QE’s impact on the dollar strengthened the case for the BOJ’s own accommodative policy stance.
SYRIZA Wins in Greece; Tsipras Demands Renegotiation
In the Greek parliamentary election held on 25 January, the radical left SYRIZA coalition led by Alexis Tsipras won a decisive victory, falling just two seats short of an outright majority and swiftly forming a coalition government with the nationalist ANEL party. The result — just 11 days before this edition publishes — represented a watershed in European politics: it was the first time a party explicitly opposed to the terms of the eurozone bailout framework had come to power in a programme country. Tsipras moved immediately to signal a new approach: his cabinet was sworn in without religious ceremonies, confrontational Finance Minister Yanis Varoufakis was appointed and promptly declared he would not deal with the “Troika”, and Greece requested a new framework agreement with its creditors. The market reaction was negative: Greek 10-year government bond yields rose sharply, Greek bank shares fell heavily, and contagion concerns — though more contained than during the 2010 to 2012 crisis period — surfaced in peripheral European bond spreads. How the standoff between the Tsipras government and its creditors resolves will be the defining European political risk of the first half of 2015.
Fed: December ‘Patient’; January Meeting Ahead
The Federal Reserve’s December 16 to 17 meeting had brought the long-awaited language change: the word “patient” replaced “considerable time” in the forward guidance, signalling that the Committee was moving toward the conditions for liftoff while explicitly retaining data dependency. Chair Yellen noted at the December press conference that “patient” meant the Committee was unlikely to raise rates for at least two more meetings — implying March was off the table, and June the earliest live date for liftoff. The January 27 to 28 FOMC meeting — the first of 2015 — was not expected to bring a change in policy, but its statement would be scrutinised for any alteration to the “patient” language in light of the oil price collapse, the dollar’s surge, and the international developments in Europe.
Jamaica Mortgage Market in January
Jamaica’s mortgage market opened 2015 in a broadly constructive position. The IMF EFF programme continued to underpin macroeconomic stability, and BOJ monetary easing had brought domestic lending rates down from their 2012 to 2013 peaks. The NHT’s J$6.5 million individual ceiling and 0, 2, and 4 per cent tiered rates continued to provide the primary affordable housing finance channel for qualified contributors. Lower global oil prices were a genuine positive for Jamaica’s import bill and current account balance, easing pressure on the exchange rate and providing BOJ with additional room to maintain its accommodative stance. The diaspora community’s interest in Jamaica property remained steady, supported by a labour market that was performing reasonably well in the key North American and United Kingdom markets where many Jamaican-born residents were employed.
Looking Ahead
January 2015 has been among the most eventful months in global financial markets since the acute phase of the eurozone crisis. The SNB shock has underscored the capacity for central bank policy surprises; the ECB’s QE launch and Greece’s political upheaval have reset the European risk landscape; and oil’s continued weakness is testing the fiscal stability of producer nations from Venezuela to Russia. For Jamaica, the near-term focus is the January FOMC statement and whether “patient” survives, the next IMF programme review, and the BOJ’s monetary policy path. A sustained period of lower global oil prices, if it translates into lower imported inflation, provides material support for the BOJ’s ability to maintain and potentially extend its easing stance through 2015.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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