The Week That Was…
Surprisingly, the SNB has removed the EURCHF 1.20 peg, pushing the CHF TWI up by 15%. In its statement, the SNB cited a rising USD and monetary policy divergence as the reasons for changing its policy floor. Cutting interest rates into negative territory has not staved off enough CHF appreciation.
The 15% CHF appreciation will push Switzerland further into deflation and unleash another wave of disinflation into a global economy already struggling with ‘lowflation’. With the ECB likely to expand its balance sheet by buying assets, including sovereign
debt, the SNB will have to place its hopes on a stronger USD.
Why change policy now? With the ECB on the cusp of delivering QE it appears the
SNB views the floor as no longer appropriate. Indeed, the broader context in which
the policy was established in September 2011 has changed dramatically with USD
strength highlighted in the statement. The floor was initiated during a period of heightened fiscal concerns in the Eurozone . By contrast, the recent downward pressure on EURCHF is due to the decline of EUR rates in response to looser ECB policy
- USD should continue to outperform over coming weeks for a variety of reasons. First, despite mixed data recently, the US remains a relative growth hot spot. Second, as markets anticipate further monetary easing in Europe and we have seen signs that EM central banks may take advantage of lower oil prices to ease policy, this makes the US’s monetary policy all the more notable.
- EUR The long anticipated ECB meeting comes next week, with both the markets and ourselves expecting QE. With QE largely priced in, there is a risk that the ECB disappoints. Markets will likely look to sell EUR on bounces from an ECB
disappointment. Returns on European assets are unlikely to pick up, particularly if the ECB does not act. As investors move out of EUR, this would drive the currency lower.
- GBP Markets expect the GBP decline to continue given the weak inflation outlook, political uncertainty and moving rate expectations. In addition, forward looking PMI services, a large part of the UK economy has also started to show signs of slowing. Economists now expect further downside for inflation, which could keep the currency under selling pressure, especially against a generally strong USD environment. GBP may gain support against EUR should the ECB not disappoint markets
- JPY The JPY has continued to see support on the back of falling risk appetite and a lack of further measures from the BoJ and Abe administration. Low oil prices are likely to push YoY core inflation to negative territory in early spring, but the BoJ is unlikely to take any further easing measures in the near future.
- AUD has received support over recent days from a combination of stronger domestic data and expectations for monetary easing in China. However, we remain bearish on the currency for a few reasons. First, falling commodity prices will have spillover effects to the financial sector, where much of the build up in leverage was based on commodity linked assets. Second, we are starting to see declines in non oil commodities, most notably the recent fall in copper.
- CAD As oil prices continue to be weak we believe that USDCAD is now poised to head higher. While falling commodity prices are likely to put pressure on the CAD in the near term, over the longer term there are second round effect of lower oil prices to think about. There is a risk to banks and real estate, both of which have indirectly boomed as a result of oil over recent years.
- EURUSD Short Term (1-3 Days): Bearish –Medium Term (1-3 Weeks) Bearish
- GBPUSD: Short Term (1-3 Days): Bearish-Medium Term (1-3 Weeks) Bearish
- USDJPY: Short Term (1-3 Days): Neutral – Medium Term (1-3 Weeks) Bullish
- USDCAD: Short Term (1-3 Days): Bullish – Medium Term (1-3 Weeks) Bullish
- AUDUSD: Short Term (1-3 Days): Bearish – Medium Term (1-3 Weeks) Bearish
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