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Forex Market Expectations Mixed Ahead of SNB Rate Decision, Threatening Volatility (Euro Open)

Thursday, 11 December 2008 04:57:08 GMT  |  Ilya Spivak, Currency Analyst

The Swiss National Bank is set to announce interest rates in European hours. Expectations are mixed, with economists predicting a 50 basis point cut while overnight index swaps price in no change in interest rates. The Euro and British Pound raced higher in late overnight trading to challenge the 1.31 and 1.49 levels, respectively.

Key Overnight Developments

• Australian Economy Sheds 15.6K Jobs in November
• New Zealand PMI Sinks to 8-Year Low, Worst On Record
• Euro, British Pound Bulls Threaten Recent Highs

Critical Levels


The Euro was well-bought in overnight trading, building slow momentum until a sudden burst of bullish momentum towards the end of the session pushed the pair to test the 1.31 level. The British Pound also advanced higher, surpassing the 1.49 mark ahead of the opening bell in London. The latest technical outlook points to near-term gains for EURUSD and GBPUSD before the longer-term down trends are resumed.


Asia Session Highlights


Australia’s economy shed 15.6k jobs in November, more than economists forecast, as businesses reduced capacity on expectation of continued deterioration in global demand. The Unemployment Rate ticked up to 4.4%, the highest in nearly 2 years. Earlier this week, a report from the National Australia Bank saw business confidence fall to the lowest in at least 11 years in the same period. We noted signs of weakness in the labor market last month despite the surprisingly strong headline figure, noting the gains were in part-time employment whereas full-time jobs suffered a net loss. This time around, part-time positions caught up to the trend and fell -24.4K. Job loses will impact wages and thereby reduce consumer spending, the largest component of overall economic growth. This surely does not bode well for the antipodean economy’s ability to weather the current downturn, with some observers suggesting that Australia will fall into recession in the first half of 2009.

In New Zealand, the Business NZ Performance of Manufacturing Index saw sentiment sink to 35.4, the worst in at least 8 years and the lowest on record. A separate report showed House Sales tumbled -45.4% in the year through November. The smaller antipodean economy has yet to show any signs of stabilization since the onset of recession saw the central bank aggressively cut interest rates by a hefty 3.25% since late July. Still, the RBNZ backed off explicit promises of further easing, saying it future moves depend on “the response to policy changes already in place”. Looking at overnight index swaps, traders have pared back rate cut expectations by a whopping 61.3% just since last week, now calling for only 75-100 basis points in reductions over the next 12 months.

The abundance of red ink on the calendar went generally unnoticed by the forex market as the Australian and New Zealand dollars. Acute economic slowdown has long been priced into the exchange rate for both currencies, with risk trends now the dominant catalyst for directional momentum. Indeed, both AUDUSD and NZDUSD are now over 96% correlated with the MSCI Index of world stock performance.

Related Articles: Australian Dollar Trading to Follow Global Stock Performance

Euro Session: What to Expect



An interest rate decision from the Swiss National Bank headlines the calendar in European hours, with expectations calling for a 50 basis point cut to bring the benchmark lending rate to 0.50%. Interestingly, overnight index swaps continue to price in “no change” for the announcement. Conflicting expectations could bring a high degree of volatility as the release crosses the wires, with the Swiss Franc positioned squarely ahead key support against the US Dollar. Interest rate decisions have produced counter-intuitive results in recent months, with rate cuts actually boosting the relevant currency as traders bet that aggressive monetary stimulus will put a country on track to recover faster from the global slowdown. To that effect, a rate cut and/or any indication that further easing may lay ahead has the potential to weigh on USDCHF.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

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