Is EURCHF Ready to Float Again?

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Market Drivers for Dec. 4, 2012
RBA cuts by 25bp and maintains neutral tone
Mild risk on overnight
Nikkei -14% Europe 0.62%
Oil $89/bbl
Gold $1706/oz.

Europe and Asia:
AUD RBA rate 25bp cut to 3.00%
GBP Construction PMI 49.3 vs. 50.7
EUR PPI 0.1% vs. 0.0%

North America:
CAD BOC Rate announcement 8:30

Risk currencies were generally higher in Asian and early European trade with EURUSD hitting 1 month highs while Aussie rallied towards the 1.0500 figure in the wake of RBA rate cut announcement. As expected the RBA cut its benchmark rate by 25bp to 3.00 percent ignoring speculation that the central bank may opt for a more dramatic 50bp move and as a result the Australian dollar rallied in relief. The RBA followed its gradualist path, noting that, ‘‘Global growth is forecast to be a little below average for a time. Risks to the outlook are still seen to be on the downside, largely as a result of the situation in Europe, though the uncertainty over the course of US fiscal policy is also weighing on sentiment at present. Recent data suggest that the US economy is recording moderate growth and that growth in China has stabilised. Around Asia generally, growth has been dampened by the more moderate Chinese expansion and the weakness in Europe.”

The central bank has now taken rates to Lehman crisis lows but as several analysts have pointed out monetary conditions in Australia are not as accommodative as may seem with banks widening their spread on variable rate mortgages. Mortgages reached a low of 5.1% in 2009, whereas now they are expected to fall to about 5.65% after today’s cut.

Despite the fact that Australian rates are now back to the 3.00% level, they remain the highest in the industrialized world and therefore the Aussie continues to be the predominant carry trade in the FX market attracting investor flows. The fact RBA remained relatively neutral in its tone suggests that it would keep rates stationary for the foreseeable future allowing the rate cut effects to take place. The RBA would only grow more accommodative if global growth suddenly showed signs of further weakening or if the internal Australian data deteriorated markedly. Therefore the pair rallied as traders were relieved that RBA is unlikely to cut rates further for now.

Meanwhile euro rose to 1.3080 in mid morning European dealing boosted by EURCHF flows as rumors spread that a major Swiss bank was going to impose a 75bp charge for deposits of 100M or more. EURCHF spiked to 1.2144 before retreating to 1.2116. The recent rise in the pair above its 1.2000 peg is indicative of relaxation of tensions in EZ periphery credit as yields in Italy and Spain continue to fall. If the pair can recapture and maintain the 1.2150 level it would suggest a base for a possible rally for organic reasons, relieving the SNB of the need to constantly support the cross rate.

In North America today, the calendar only carries the BOC decision with markets expecting no change from the central bank and given the fact that loonie remains below parity, no likelihood of any hawkish rhetoric from Carney and co. If risk flows remain positive into the US session both EURUSD and Aussie will continue to churn higher targeting 1.3100 and 1.0500 respectively as the day proceeds.

Boris Schlossberg
Managing Director

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