It has been a strange couple of weeks in international finance.  The only event that went somewhat according to script was the European Central Bank meeting on Thursday, where the announcement of quantitative easing was a little greater in size and duration than market expectations and media reports.

Going off script these days are the Swiss National Bank, Bank of Canada, Central Bank of Denmark, and, as some fear, the U.S. Federal Reserve.  In today’s geopolitical economy, central banks are supposed to be “White Knights,” or calming and stabile forces, while the wild swings of market speculation produce the rare and shocking events known as “Black Swans”.  These days, however, the White Knights are the ones producing the Black Swans. 

It started with the Swiss National Bank’s decision to abandon the currency peg with the euro, two days after one official had denied it would ever do so.  The result was a shock to the financial system, with the Swiss franc appreciating up to 40% against the euro and dollar in one day, before settling back to just 12-16% above previous levels.

The shocks continued this week with the Bank of Canada, which shocked the markets with a 25 basis point rate cut on Wednesday, sending the Canadian dollar to lows not seen since June 2009.  The Canadian news is particularly noteworthy, in that the Bank of Canada warned markets that low oil prices could hurt the Canadian economy more than previously thought.

It inevitably leaves traders to wonder what Black Swan event might be coming next, and the U.S. Federal Reserve is the obvious target of speculation.  Markets have priced in a rate hike in the middle to second half of 2015, but as the global economic situation deteriorates further, talk inevitably turns to the possibility that the Fed will put off raising rates until 2016. 

The one common thread running through all of these central bank decisions is, unsurprisingly, the price of oil.  For the Fed in particular, the decision to raise rates is an easy one without low oil prices hinting at deflation.  To date, the Fed has stayed above the fray and indicated that its course is intact, as it sees oil swings as temporary.  History proves them right. 

By definition, surprises are unexpected.  And this year, there may be more to come.  Here at City National Bank, we also had a surprise announcement. The Bank has decided to merge with the Royal Bank of Canada. This is great news for City National, and even better for our clients. Please feel free to call us if you have any questions.

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