Dollar Hits Five-Month High on Risk Aversion, Euro Spikes Up Against Swiss Franc

Key Overnight Developments

• US Dollar Soars on Risk Aversion as Asian Stocks Decline
• RBA Says Interest Rates to Rise to 4.5% by End of 2010
• Euro Spikes Higher Against Swiss Franc, SNB Action Hinted

Critical Levels



Euro tested below 1.3670 against the Dollar as safe-haven flows boosted the US currency (see below) but prices corrected higher to yield an effectively flat result ahead of the opening bell in Europe. The British Pound trended lower, losing as much as 0.4% against the greenback. We remain short EURUSD at 1.4881 and have also entered short GBPUSD at 1.5765.

Asia Session Highlights



Risk aversion dominated currency markets in overnight trading as stocks tumbled across Asian exchanges, pushing the safety-linked US Dollar to a five-month high. The MSCI Asia Pacific regional stock benchmark dropped the most in ten weeks following an aggressive selloff on Wall St after weekly US jobless claims figures proved disappointing, weighing on hopes of a speedy recovery in demand from the world’s largest consumer market.

Australia’s AiG Performance of Construction Index soared to 57.7 in January, showing the building sector not only expanded for the first time in three months but did so at the fastest pace since in two years. The reading mirrors yesterday’s jump in building approvals, but as with that data, today’s outcome was largely overlooked as being driven by last year’s stimulus measures. Such outcomes have failed to impress recently as trades become increasingly concerned with the recovery’s ability to sustain itself after the boost from government cash evaporates. Even the hawkish tone of the Reserve Bank of Australia’s Quarterly Monetary Policy Statement failed to spark significant momentum. The RBA upgraded their forecasts for economic growth and inflation and even went so far as to say the higher figures assumed benchmark interest rates at 4.5% by the end of the year, essentially committing to 75 basis points of additional tightening over the next 9 months.

The Euro soared against the Swiss Franc late into the session, with rumors of intervention from the Swiss National Bank making the rounds in the aftermath the advance. Aggressive EURUSD and EURJPY selling dragged EURCHF lower to quickly break below the 1.46 level for the first time in close to a year, allegedly prompting the central bank to backstop the currency. The SNB has openly stated since early 2009 that it intends to intervene against EURCHF as a bulwark against deflation, but the possibility of such an outcome faded into the background after the cross drifted below 1.50 in December, a level then thought to be policymakers’ threshold. An alternative explanation of the SNB’s approach was described in a report from Commerzbank AG released two days ago, which claimed that “the Swiss National Bank is interested in the speed of the Franc’s appreciation and not in a particular level,” a theory that seems to make sense given recent price action.

Euro Session: What to Expect



The UK Producer Price Index is expected to add 3.7% in the year to January, marking the fifth consecutive increase in the annual pace of wholesale inflation. Core producer prices – a metric that filters out volatile items like oil and food – is set to print unchanged from the previous month at 2.6%. The spread between headline and core PPI readings has been widening since November, hinting that the recent gains are likely linked to the boost from higher energy prices that continue to work their way into the overall economy. Indeed, companies seek to insulate themselves from market risk by locking in energy prices for some time, meaning there is typically a delay between movements in crude and their reflection in PPI.

Turning to the Continent, German Industrial Production is set to fall -3.7% in the year to December, marking the smallest decline in 14 months as year-on-year comparisons continue to reflect the boost to overseas demand for German manufactured goods from global fiscal stimulus efforts. Output is expected to gain 0.6% from the previous month, a narrowly lower reading than the 0.7% registered in November.

On balance, the European batch of economic releases looks relatively tame with nothing on the calendar that is likely to prove market-moving as traders look ahead to the always-critical US Nonfarm Payrolls report set to cross the wires late into the session. A vote on a regional financing bill in Portugal might prove to be a wildcard: the country’s finance minister has already sounded off against the measure fearing that taking on additional debt would further shake market confidence in southern Euro Zone economies’ ability to trim their deficits. Rising credit risk played an important part in sending the Euro lower yesterday and more of the same could be ahead if Portugal’s funding measure is passed.

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