Headlines
- SNB removes 1.20 EUR/CHF floor – Volatile shockwaves hit financial markets.
- POUND HITS 7-YR HIGH VS. EURO – SNB was largest buyer of single currency.
- SNB decision appears to signal ECB QE – Draghi could launch massive stimulus programme next week.
- GBP/USD falls half a cent – US Dollar hits 11-yr high vs. Euro.
Sterling
With no fresh domestic data to contend with, British traders may have been expecting a quiet end to the week…Not this time guys! A shock decision from the Swiss National Bank to remove its 1.20 CHF/EUR cap after three years of heavy intervention in the currency market sent shockwaves around financial centres all over the world.
Prior to yesterday morning the SNB was the largest buyer of Euros, so when it decided to stop purchasing the single currency the repercussions were brutal: Sterling hit a seven-year high against the Euro, the US Dollar struck an 11-year high against the Euro and the Swiss Franc rose by around 30% to an all-time high against the Euro.
Euro
The capitulation of the dam put up by the SNB, designed to protect the Swiss economy from an overvalued, export-harming currency, helped drive investors out of the single currency in record numbers yesterday. The Pound rose by around 1.5 cents to hit its highest level against the Euro in over seven years. Sterling’s impressive intraday gain was the largest for over a year.
SNB Chief Thomas Jordan, who was dubbed ‘the most-hated man’ in the foreign exchange industry by the Financial Times for his decision to release the bank’s three-year-old cap, said that the ‘Russian Rouble crisis’ combined with the impending threat of ‘quantitative easing’ from the European Central Bank meant that it was no longer prudent to continue maintaining the cap.
In case you’re wondering what the Russian Rouble crisis has got to do with the CHF/EUR peg: the recent influx of safe-haven flows from Russia means that the Swiss Franc has been appreciating swiftly over the past few months, which in turn has caused the SNB to throw ever larger sums of money at the Euro in order to hold the 1.20 peg.
The SNB’s decision to act now, one week before the European Central Bank’s next policy meeting, suggests that the ECB is planning to launch a larger asset purchasing scheme than the €500 billion plan that was supposedly leaked over the newswires last week. The ECB and the SNB maintain a close relationship, meaning that Swiss officials almost certainly have good knowledge of what Mario Draghi and co. have got up their sleeve.
The landmark day on financial markets ended with Sterling standing at its strongest level against the Euro since September 2008.
US Dollar
Cross trade flows caused the US Dollar to appreciate by around half a cent against the Pound yesterday. The principal impact of the SNB announcement was for the Euro to weaken across the board. With its largest buyer no longer a buyer, the single currency plunged unanimously lower against the majors. This included a sharp -1.7 cent decline against the US Dollar, which brought EUR/USD down to an 11-year low. As a secondary consequence of this massive jump in demand for the ‘Greenback’, the Pound also weakened against the US Dollar.
As the world’s premier reserve currency and go-to save haven investment denomination, the US Dollar was the big winner yesterday. The ‘Greenback’ also attracted buyers in reaction to a robust US empire manufacturing index of +9.95, up from -1.23 previously.
Sometimes copper is referred to as ‘Doctor Copper – the only metal with a PhD in economics’, due to its uncanny ability to accurately predict economic trends. Historically, when copper prices rise, the global economy booms; when copper sinks, so does the global economy.
Consequently, the recent dip in copper prices to a five-year low has caused some forecasters to start fearing the worst. But students of ‘Doctor Copper’ were likely in good spirits yesterday because a 2.3% rebound in the precious metal appeared to have put global recession fears on hold. The uptick in demand for copper also had an impact on the Canadian Dollar, helping it rally by around two cents against the Pound.
Global oil prices also rebounded yesterday morning, however, these gains were swiftly erased when speculators reacted to a report from the Organization of Petroleum Exporting Countries (OPEC) signaling that average demand for the ‘black gold’ is set to fall by 100,000 barrels a day. The damning verdict also spelt the end for the ‘Loonie’s’ gains against the Pound, leaving GBP/CAD virtually flat on the day.
A sturdy rise in job creation took the Australian Dollar higher against the Pound yesterday. The latest jobs report showed that 37,400 new positions were filled in December, which helped bring the Australian unemployment rate down from 6.3% to 6.1%. Demand surged for the ‘Aussie’ following the stronger-than-expected result because the sanguine figures were seen to ease pressure on the Reserve Bank of Australia to start cutting interest rates. GBP/AUD tumbled by around two-and-a-half cents.
Sterling declined by over three cents against the New Zealand Dollar yesterday. The main driver behind the sharp move was the SNB announcement because not only did the Swiss National Bank remove it’s CHF/EUR floor, it also pushed negative interest rates even lower from -0.25% to -0.75% to help deter investment. Although the decision to stop selling huge numbers of Francs sent the Swiss currency surging across the board, it also sent some investors searching for yield. And with a benchmark interest rate of 3.50%, New Zealand was a prime candidate for such currency flows.
Data Released Today
10:00 EUR Euro-Zone Consumer Price Index (YoY) (DEC F) -0.2%
13:30 USD Consumer Price Index (YoY) (DEC) 0.7%
14:15 USD Industrial Production (DEC) -0.1%
15:00 USD U. of Michigan Confidence (JAN P) 94.1