British Pound and Swiss Franc in Focus as BOE, SNB Announce Interest Rates

Key Overnight Developments

• Australian Dollar Surges as Jobless Rate Unexpectedly Declines
• RBNZ Hints Rates May Rise Sooner Than Previously Forecast

Critical Levels



The Euro and the British Pound oscillated with neither the bears nor the bulls able to build meaningful momentum in the overnight session, yielding effectively flat results ahead of the opening bell in Europe. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights



Australia’s Unemployment Rate unexpectedly fell to 5.7% amid expectations of an increase as the economy added 31,200 jobs in November. Economists had expected only 5,000 new jobs ahead of the release and predicted the jobless rate would rise to 5.9%. More encouraging still, most of the increase came from a 30.8K increase in full-time positions, hinting that businesses are fairly confident in future demand and so feel comfortable committing to greater expenditures on labor. The Australian Dollar surged as the crossed the wires with traders adding to bets that the pace of economic recovery will allow the central bank to raise interest rates again when policymakers convene in February. Indeed, a Credit Suisse gauge of priced-in rate hike expectations now puts the probability of a 25 basis point increase at 67% versus just 43% yesterday.

The hawkish outlook was further reinforced by comments from RBA assistant governor Guy Debelle, who said that although the Australian Dollar carry trade seemed to be back in vogue, he was not concerned about the size of current positioning and reminded markets that the central bank takes the exchange into account when setting monetary policy. Put simply, Debelle’s comments suggest that the RBA has raised rates with full knowledge that it would likely send the Aussie higher and has not been put off by recent gains (despite their negative implications for the export sector).

The Reserve Bank of New Zealand kept rates unchanged at 2.5% as expected, but a hawkish shift in rhetoric proved enough to send the Kiwi Dollar soaring against its major counterparts. RBNZ Governor Alan Bollard said that the economy may support “beginning to remove monetary stimulus around the middle of 2010.” Previous policy statements over recent months saw the central bank chief forecast that rates will stay “at or below the current level” until the latter part of next year. The bulls were further encouraged by the comment that a “tightening in financial conditions [including] a higher exchange rate and increased long-term interest rates reduces the need for more immediate action,” hinting that the central bank already sees the economy on clear enough path to recovery to warrant tighter monetary conditions.

Euro Session: What to Expect



Interest rate decisions from the Swiss National Bank (SNB) and the Bank of England (BOE) headline the economic calendar in European hours. Both central banks are all but certain to keep benchmark interest rates unchanged, with the markets focused on the direction of their non-standard easing measures as the primary catalyst for price action after the announcements cross the wires. On balance, significant changes to monetary policy seem unlikely.

In Switzerland, consumer prices fell at an annual pace of -0.97% in the third quarter, the most since records began nearly four decades ago. Further deflation (albeit at a slower pace) is expected in the three months ending December while the economy has shown few signs of self-sustaining recovery industrial production continues to shrink at an accelerating rate and unemployment pushes higher. Switzerland depends on external demand for a hefty portion of its economic growth and so is inherently dependent on a rebound abroad before a robust rebound is in place, hinting that the SNB has plenty of scope to push ahead with a loose monetary stance for the time being. Indeed, a Credit Suisse gauge of yield expectations hints traders are pricing in just 25 basis in tightening over the next 12 months, the smallest after Japan among major economies.

Turning to the BOE, significant changes to the status quo are also unlikely. Last month, the central bank expanded the size of its asset-buying quantitative easing (QE) program to 200 billion as an updated quarterly inflation report revealed expectations that inflation will remain subdued in the medium- to long-term despite a likely near-term upswing. The bank predicted that the program would take three months to be completed, leaving them in wait-and-see mode for the time being until the outcome of the increase can be more clearly assessed. The latest consumer price index readings have shown that inflation has edged a bit higher, seemingly supporting the bank’s projections and offering little impetus to change gears for now. However, Mervyn King has said that he is open to further capital to the QE program while minutes from November’s policy meeting revealed the rate-setting committee had been considering cutting the interest rate it pays on bank deposits as an additional avenue to boost lending, suggesting the risks of a surprise at the announcement lean toward the dovish side of the spectrum.

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