Central bank conflicts coming into the open, promising 'volatility'


Switzerland's abrupt reversal on the franc's euro peg reminds markets that central banks can't be trusted.

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Swiss National Bank Shocks the World

By Simon Kennedy
Bloomberg News
Thursday, January 15, 2015

The road to normal is proving to be bumpy.

Stunning monetary-policy shifts in Switzerland and India sent markets on wild rides, highlighting Federal Reserve Chair Janet Yellen's November warning that "normalization could lead to some heightened financial volatility."

Following today's wake-up calls, the Swiss franc surged as much as 27 percent against the dollar, moving more like the the Ukrainian hryvnia than the seventh-largest reserve currency. Mumbai's benchmark stock index posted its biggest gain in more than a year.

In India, Reserve Bank Governor Raghuram Rajan cut his key interest rate for the first time in 20 months. Six hours later Swiss National Bank President Thomas Jordan abandoned a 3-year-old cap on the franc's gains. Both decisions were unscheduled and, in Switzerland's case, unexpected.

The lessons for investors: Central banks are no longer aligned and again a source of volatility rather than calm in financial markets. Also, forward guidance has its limits as policy can shift abruptly when economic conditions change and officials still like the odd surprise. ...

Since the financial crisis erupted in 2008 and the world tumbled into recession, major central banks have deployed ultra-easy policy in the form of near-zero interest rates and cheap cash that Deutsche Bank AG estimates totaled $10 trillion.

The unity and abundance of liquidity becalmed markets, yet now frictions are emerging that will likely roil them.

The SNB noted the end of solidarity was one reason to discontinue the cap, saying division is "a trend that is likely to become even more pronounced." As the Fed readies to tighten monetary policy, deflationary forces mean the ECB is looking to ease anew. The Bank of Japan has already done so. ...

... For the remainder of the report:



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