Dollar Rally Post-FOMC Bolstered by Surprise SNB Action
- USDCHF bursts to fresh yearly highs after SNB goes negative.
- USDJPY back in uptrend, but yet to clear recent swing highs.
Central banks have been quite active over the past 24-hours. Yesterday the FOMC stirred speculation over the timing of its policy normalization, as it clearly struggles with transitioning from time-based guidance to responding to incoming economic data.
While the phrase "considerable time" was left in the statement, the FOMC's choice to include the word "patient" to describe its attitude towards raising rates is an interesting one. In fact, the last time the FOMC statement included the word "patient" in this context was back in January 2004 and March 2004, which preceded the June 2004 rate hike. The phrase "considerable period" was used in the four prior statements in 2003, for comparison.
These are different FOMCs run by different Fed chairs, but the specific language here can't be overlooked. Nor is the coincidence that, as the European Central Bank grapples with introducing a major QE program at its January 22 meeting and fears of a Russian currency crisis rise, that the Swiss National Bank has taken steps to deter investors and speculators from fleeing to the Swiss Franc. In a sense, the SNB’s introduction of negative interest serves as a measure to front run a massive balance sheet expansion by the ECB.
The SNB's introduction of negative interest rates today, for the first time since the 1970s, throws a wrench into some of the EUR-crosses, given the Euro's near-perfect positive correlation with the Swiss Franc since September 6, 2011, when the SNB raised the Sf1.2000 floor (EURUSD and CHFUSD daily correlation over this time period is +0.96). If anything, the central banks' actions over the past 24-hours may be helping the US Dollar realign with its December seasonality tendencies.
See the above video for technical considerations in EURUSD, USDCHF, and USDJPY.
--- Written by Christopher Vecchio, Currency Strategist
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