Yesterday was one of those extraordinary days in currency markets that only come around once in a blue moon. As we mentioned, the Swiss National Bank (SNB) abandoned their ceiling for the Swiss franc against the euro, there’s no need for me to rehash what happened afterwards, but we should try to understand why. I mean really… why now? I have a suspicion that Mr Draghi may have alerted the SNB that Eurozone quantitative easing is likely to be announced shortly, in light of that a continued defence of the ceiling would be pointless. Over the last few years, the SNB has bought hundreds of billions of euros in order to prevent EUR/CHF from collapsing through the 1.20 level, if the ECB were to begin QE with the expressed intent of expanding their balance sheet by €1trn euro, the flows could be overwhelming. Of course this is just my speculation, I’ll leave events to play themselves out so we can see if I hit the mark. In any case, the market impact of the SNB decision was instantaneous. EUR/USD dropped from 1.1760 to 1.1580 in quick order, and European stocks dropped in the immediate aftermath with Eurostoxx falling 3% in the first 10 minutes. However, after a few hours we saw a strong reversal with stocks ending the session higher. I would like to think people took note of the following ParityFX tweet:
@parityfxplc : “#EURCHF #SNB #USDCHF Well well well… I wonder if Mr Draghi gave the SNB the nod that QE is about to happen. Peripheral debt anyone??”
Little noticed in all the carnage was the fact that EUR/GBP has smashed through lows that have been in place since 2009. Technically there now exists free space between where we are 0.7650 or so and the 0.7250 support zone that goes all the way back to 2003. Who knows this could help the Spanish property market if the euro really starts to feel cheap in British pockets!
The dollar continues to do.. not much. Once you look outside of European currencies it’s hard to make a case that the greenback is strengthening at all. As I said we will always have pauses in trends, it is natural and healthy. Perhaps the Philly Fed data yesterday is partly responsible, as well as the indiscriminate buying of Swiss francs against all currencies. On the other hand Empire Manufacturing data was solid, as was the Bloomberg consumer confidence indicator. All much of a muchness to be honest… I doubt anyone really paid attention to data yesterday. Surely every currency trader only had eyes for the Swissie!
Today we have inflation numbers for the Eurozone as a whole. We should all pay close attention to this, because if it’s lower than forecast and previous numbers it adds fuel to the QE fire. To be honest, today might as well be called inflation day, because we have data coming out in the US as well. Contrast the expectations of 0.8% yoy numbers for the Eurozone versus 1.7% in the US. Also important will be the Michigan sentiment data out later in the afternoon.
Yet again, US markets sold off into the close, it’s becoming a bad habit, and we’re now very close to the mid-December lows. It can be looked at in a couple of ways, these are either fantastic risk reward levels to increase ownership of US stocks, or a serious reassessment of the technicals will have to be conducted if those lows are breached. As always we will update you, and present our views as events progress. Enjoy your weekend.
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