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Dollar Finds Limited Haven Status after Swiss Central Bank Surprise

Dollar Finds Limited Haven Status after Swiss Central Bank Surprise

2015-01-16 06:01:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Finds Limited Haven Status after Swiss Central Bank Surprise
  • Swiss Franc Surges after SNB Surrenders EURCHF Floor
  • Euro Loses a Buyer, Attention Turns to the ECB Next Week

Dollar Finds Limited Haven Status after Swiss Central Bank Surprise

The Forex market suffered perhaps its biggest shock in decades, but the Dollar drew conspicuously limited safe haven flow. On the news that the Swiss National Bank (SNB) had surrendered its efforts to maintain a cap on its currency versus the Euro, European currencies exploded in activity. In turn, short-term (one-week) volatility in the FX market surged by approximately 35 percent and continued to swell through Asia trading Friday morning to hit levels not seen in three years (14.9 percent). Yet, as extraordinary as the market activity was, the favored currency for liquidity would see limited appeal. Though the Dollar generated gains against the Euro and Pound, its performance elsewhere was either mixed or negative. The fear didn’t fully ripple out to the capital markets either.

The S&P 500 took a tumble and eventually closed below 2,000 – the floor of a two-year rising trend channel – but immediate follow through was limited through. However, as robust as markets seem in the immediate wake of the ‘black swan’ event, the risk implications run deeper. With the proliferation of capital and real market leverage, the reach for yield in risky assets and the dependency in low volatility; this is a serious crack in the façade of confidence. Much of the market’s exposure is either explicitly or implicitly reliant on assurance crafted by central banks accommodation. Seeing a failure of this magnitude shows the policy authorities are not infallible, that conflicting monetary policy (some would say ‘currency wars’) adds new troubles and reminds that the Fed is rolling back its own pledge as it moves towards normalization. Top event risk for Friday’s session is December CPI, but markets will remain preoccupied with concerns of ‘risk’ and the Fed’s meet January 28.

Swiss Franc Surges after SNB Surrenders EURCHF Floor

The Swiss National Bank did the unspeakable for a major central bank: it triggered extreme volatility in the currency market. Maintaining stability in exchange rates and domestic financial markets is a key role for policy authorities, but the SNB did little to blunt the pain. In an unexpected announcement, the bank announced it was abandoning its three-year policy of holding up a floor on EURCHF at 1.2000 and that it was lowering its interest rate to -75 percent (a target range of -1.25 and -0.25 percent). The announcement was a surprise, the means for which it was done was a shock. There are few good ways to abandon a key policy such as this, but communication is exceptionally important. Rather than back off its commitment to the policy or take small steps to dull its impact, SNB Vice Chairman stated as recently as Tuesday that the floor was a key tenet of their policy and the group summarily announced the change.

The reasoning behind this uncharacteristic move by a major central bank renowned for its steadfastness may signal another fold in the financial system. Against a future of buying a Euro that would continue to tumble under an expansive ECB stimulus program while only keeping the rate unchanged, the risks seemed large. However, they were not new nor unknown. This may be intended to serve as a warning on the consequences of competitive monetary policy or a necessary response to an impending threat like ECB QE.

Euro Loses a Buyer, Attention Turns to the ECB Next Week

From the SNB’s move, many traders are drawing the conclusion that Swiss officials are either very concerned over – or perhaps have knowledge of – a much more substantial stimulus program coming from the ECB in the near future. Given the public debate over the merits of a full-scale QE program and the policy meeting scheduled for next Thursday, concerns are clear. Expectations for a move next week are now likely very high, and one of the few steady bidders on the Euro (the SNB) is gone. Expect a very volatile week for the Euro next week.

Japanese Yen Crosses Drop on Central Bank Backdrop

Yen crosses dropped across the board Thursday as a swell in FX volatility unnerved longs that are dependent on an anemic yield and quiet market conditions. While other asset classes and benchmarks (S&P 500 for example) may be a few steps out from the epicenter, the sensitivity to volatility, central bank policy and the unknown is very high for these carry trades.

Pound a Haven for Europeans but Liability Elsewhere

There was a distinct divergence in performance for the Pound against European currencies and non-European currencies. For Europe, the Pound is a considerable haven to Swiss volatility and Euro-area financial/economic uncertainty. In contrast to Asian and American currencies, it shares the stain of risk from its neighbors. EURGBP and GBPUSD will act as good, dual divining rods of the Pound’s performance.

Emerging Markets: Russia to Open Wealth Fund to Reinforce Ruble

Emerging Market volatility jumped over six percent Thursday – far less than the broader FX market’s own activity levels. With the MSCI EM ETF essentially unchanged Thursday, we have another perimeter measure of risk from central bank policy fallout. Meanwhile, local effort to offset the Dollar’s march higher (and the Ruble’s drop) saw Russia announce it would tap its $88 billion Reserve Fund to fight the one-direction move.

Gold Jumps to Four-Month High as Currency Market Shudders

At the sound of a ‘currency shock’, gold comes calling. The precious metal found one of its strongest fundamental bids since the global central bank collective was in the early phases of its unconventional policy appetite. It is worth noting that the dramatic volatility from the Franc generated far more bullish traction than the BoJ’s stimulus efforts. Instability is the ultimate spark for this FX alternative.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

23:50

JPY

Tertiary Industry Index (MoM) (NOV)

0.20%

-0.20%

23:50

JPY

Japan Buying Foreign Bonds (JAN 9)

¥19.7B

Japan has been buying foreign stocks at positive rate after the BOJ Stimulus in October 2014.

23:50

JPY

Japan Buying Foreign Stocks (JAN 9)

-¥40.7B

23:50

JPY

Foreign Buying Japan Bonds (JAN 9)

-¥26.3B

23:50

JPY

Foreign Buying Japan Stocks (JAN 9)

-¥40.7B

2:00

NZD

Non Resident Bond Holdings (DEC)

66.50%

Has been rising in the past 5 years.

7:00

EUR

EU 25 New Car Registrations (DEC)

1.40%

7:00

EUR

German Consumer Price Index (MoM) (DEC F)

0.00%

0.00%

These measures aren’t likely to be market moving as they are final revisions.

7:00

EUR

German Consumer Price Index (YoY) (DEC F)

0.20%

0.20%

7:00

EUR

German Consumer Price Index - EU Harmonised (MoM)

0.10%

0.10%

7:00

EUR

German Consumer Price Index - EU Harmonised (YoY)

0.10%

0.10%

8:00

CHF

Retail Sales (Real) (YoY) (NOV)

0.30%

Not likely to be market moving.

10:00

EUR

Eurozone Consumer Price Index (MoM) (DEC)

-0.10%

-0.20%

These measures aren’t likely to be market moving as they are final revisions for the month of December. Next week’s ECB meeting on Jan 22 will be watched by the market.

10:00

EUR

Eurozone Consumer Price Index (YoY) (DEC F)

-0.20%

0.30%

10:00

EUR

Eurozone Consumer Price Index - Core (YoY) (DEC F)

0.80%

0.80%

13:30

USD

Consumer Price Index (MoM) (DEC)

-0.40%

-0.30%

Inflation figures are important as the Fed looks to inflation when deciding on policy. Currently, inflation is below the 2% target. With lower oil prices, the Fed expects that inflation may dip in the short run, but climb up to 2% in the long run.

13:30

USD

Consumer Price Index Ex Food & Energy (MoM) (DEC)

0.10%

0.10%

13:30

USD

Consumer Price Index (YoY) (DEC)

0.70%

1.30%

13:30

USD

Consumer Price Index Ex Food & Energy (YoY) (DEC)

1.70%

1.70%

14:15

USD

Industrial Production (DEC)

0.20%

1.30%

Has been growing at a positive pace every month in 2014 except August.

14:15

USD

Capacity Utilization (DEC)

80.00%

80.10%

Has been rising in 2014 as the US economy strengthens.

14:15

USD

Manufacturing (SIC) Production (DEC)

0.20%

1.10%

Has been showing expansion in 10 out of the 12 months in 2014.

15:00

USD

U. of Michigan Confidence (JAN P)

94.3

93.6

Has been increasing with the strength of the US economy in 2014. Last figure was the highest since June 2005.

21:00

USD

Total Net TIC Flows (NOV)

$178.4B

US financial assets look more attractive to foreign investors as the US economy is recovering and the Fed is getting ready to hike rates while the rest of the world is keeping policy loose.

21:00

USD

Net Long-term TIC Flows (NOV)

-$1.4B

GMT

Currency

Upcoming Events & Speeches

9:00

EUR

ECB's Costa Speaks at Conference on Adjustment of Economics

12:50

USD

Fed's Kocherlakota Speaks on Economy and Monetary Policy

16:00

USD

Fed's Williams Speaks in San Francisco

18:10

USD

Fed's Bullard Delivers Presentation on U.S. Economy and Monetary Policy

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

15.5900

2.5000

12.7000

7.8165

1.3650

Resist 2

8.7400

6.8500

8.4735

Resist 1

15.0000

2.4000

11.8750

7.8075

1.3475

Resist 1

8.1375

6.3325

7.8360

Spot

14.8820

2.3268

11.7308

7.7545

1.3372

Spot

7.9351

6.2688

7.7560

Support 1

14.3800

2.1900

10.2500

7.7490

1.3200

Support 1

7.5200

5.9100

7.2945

Support 2

13.6800

2.0700

9.3700

7.7450

1.2000

Support 2

7.3285

5.7775

6.7280

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.1986

1.5261

120.52

1.0225

1.1933

0.8159

0.7844

143.03

1243.42

Res 2

1.1957

1.5229

120.17

1.0198

1.1907

0.8136

0.7820

142.62

1236.80

Res 1

1.1928

1.5198

119.83

1.0172

1.1881

0.8113

0.7796

142.22

1230.19

Spot

1.1870

1.5135

119.13

1.0119

1.1829

0.8066

0.7749

141.41

1216.95

Supp 1

1.1812

1.5072

118.43

1.0066

1.1777

0.8019

0.7702

140.60

1203.71

Supp 2

1.1783

1.5041

118.09

1.0040

1.1751

0.7996

0.7678

140.20

1197.10

Supp 3

1.1754

1.5009

117.74

1.0013

1.1725

0.7973

0.7654

139.79

1190.48

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

Sign up for John’s email distribution list, here.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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