- USD has been trading sideways since yesterday as the single currency continued moving lower on speculation that the ECB will somehow increase its stimulus
- GBP remains under substantial pressure as investors continue to expect harsh consequences amid the UK decision to leave the European Union
- We believe that the market has now almost completely priced in a December interest rate hike by the Federal Reserve, therefore further dollar gains are unlikely
- SNB might intervene in the FX market to weaken the CHF as the currency pair re-tested the 1.08 level
- The SNB has already expanded its balance sheet to 110% of its GDP and we believe that there is still room for further expansion
- Downside pressures are still weighing on the EURCHF despite the SNB’s massive intervention. We naturally remain bearish on the pair
- Volatility should come back with the end of the European QE program looming
After surging more than 0.50% last week, the US dollar has been trading sideways since yesterday as the single currency kept moving lower on speculations that the ECB will somehow increase its stimulus against the backdrop of subdued inflation and anaemic growth, while the pound sterling remained under substantial pressure as investors continued to expect harsh consequences amid the UK decision to leave the European Union. Yesterday, the dollar index climbed to a nine-month high at 98.846 as EUR/USD tumbled to 1.0860 and the cable traded at around 1.22. We believe that the market has now almost completely priced in a December interest rate hike by the Federal Reserve. Therefore, we believe that further dollar gains are unlikely.
During the Asian session, EUR/USD treaded water at around 1.0870, edging down 0.04%. GBP/USD took a small hit as it slid 0.15% to 1.2220. In Switzerland, EUR/CHF’s response to Thomas Jordan’s speech was muted. The currency pair has consolidated at around 1.0810 over the last 24 hours as Mr. Jordan reiterated the necessity for negative interest rate but underlined that negative interest rates are a temporary solution and that side-effects have to be closely monitored. Over the last two weeks, the Swiss franc strengthened substantially as the market sent the single currency to multi-month lows. The odds are pretty goods that the SNB will have to intervene - once again - in the FX market to weaken the CHF as the currency pair tested again the 1.08 level. This level is now broadly seen as an implicit floor as the Swiss National Bank systematically stepped in when EUR/CHF got closer to 1.08.
Yann Quelenn, market analyst: “SNB monetary policy to remain ultra-loose: Yesterday, Thomas Jordan, the SNB Chairman, held a press conference in Bern. As the SNB is struggling to stimulate its economy. Its short and long-term yields are negative and while the consequences of such a monetary policy are not exactly known, the impact on banks and investors must be assessed. According to Jordan, “The cost associated with negative interest is lower than the cost of holding cash”, which we do not believe knowing that from our perspective, the cost of negative interest rate will be always higher than the cost of holding cash, especially if inflation comes back. Further decreasing interest rates may trigger a bank run or a least a flight to cash that would be damaging to the economy. Jordan also mentioned that the SNB is not willing to limit or abolish cash in order to prevent such adverse effects and other monetary tools such as helicopter money. At this point, the SNB has expanded its balance sheet to 110% of its GDP and we believe that there is still more room for further expansion, especially when looking at other countries with significantly higher debt to GDP ratio such as Japan or the United States. Downside pressures are still weighing on the EURCHF despite the SNB’s massive intervention. We naturally remain bearish on the pair. The main driver of the pair is clearly the ECB and the December meeting is highly anticipated by financial markets. Volatility should come back then knowing that the end of the European QE program looms.” ---
In the equity market, Asian regional returns were mostly trading higher. In Japan, both the Nikkei and Topix index extended gains, climbing 0.76% and 0.71% respectively. In China, the Shanghai and Shenzhen Composites rose 0.05% and 0.29%, while offshore the Hang Seng slid 0.11%. Further South, Australian shares were up 0.63%, while in New Zealand the NZX 50 was up 0.64%. US futures were blinking green on the screen. Finally, European futures were trading higher across the board with the Footsie up 0.22% and the DAX surging 0.14%.
Today traders will be watching PPI from Spain and Sweden; IFO survey from Germany; industrial orders from Italy; current account balance, FDI and COPOM monetary policy meeting minutes from Brazil; consumer confidence index and Richmond Fed manufacturing index from the US. On the central bank side, Draghi will address in Berlin, BoE’s Carney will speak before the economic committee, while in the US, Fed’s Lockhart will also speak.