SNB Goes Negative – Will That Be Enough for EUR/CHF?

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Market Drivers December 18, 2014

SNB goes negative rates but EURCHF pop fizzles at 1.2100
UK Retail Sales beat IFO in lina
Nikkei 2.32% Europe 2.11%
Oil $57/bbl
Gold $1198/oz.

Europe and Asia:
CHF SNB -25bp
EUR GE IFO 105.5 vs. 105.5
GBP UK Retail Sales 1.6% vs

North America:
USD Weekly Jobless 8:30
USD Philly Fed 10:00

Its been a night of unexpected moves in the currency market as the Swiss National Bank went to negative rates cutting the benchmark rate to -25 basis points in order to defend it floor of 1.2000 on the EUR/CHF exchange rate.

Ever since the SNB failed to deliver the negative rate decision at its last meeting, the market has been pushing the EUR/CHF lower in an attempt to test the mettle of the central bank. The pair spend the last three days hovering at 1.2010 within just 10 points of the key support level. In addition the currency crisis in Russia may have accelerated the demand for the safe haven harbor of the Swiss franc and if the ruble continues to depreciate the Swissie could see further capital flows from that region. The SNB therefore decided that it had no choice but to defend the position by going to negative rates today.

The central bank reaffirmed it commitment to defending the barrier and noted that it was prepared to take further measures if necessary including buying up unlimited amount of euro if needed.

The move initially spiked the EUR/CHF to 1.2097 but it quickly gave up half its gains and traded at 1.2040 by mid morning European dealing. The retreat from the highs is telling as it suggests that the market remain sceptical of SNB’s ability to maintain this level in perpetuity.European monetary authorities have been making continuous remarks that the ECB intends to commit to a full QE program at the start of the new year and if it were to do so that would bring fresh downward pressure on the EUR/CHF cross.

In short despite the negative interest rates and the unambiguous rhetoric the EUR/CHF cross remains under pressure especially if geopolitical tensions escalate into new year. In his state of the union address today, Russian President Vladimir Putin appeared utterly unrepentant for the events of the past week and used blustery language that seemed to unnerve the market sending USD/RUB – which dropped to 55.00 earlier in the day – back to 62.00 as traders saw no serious policy initiatives to deal with the current crisis.

Elsewhere the economic news completely overshadowed by the geopolitical events as EURUSD essentially ignored a slightly better than expected IFO and cable quickly gave up its gains after UK Retail Sales printed at 1.6% versus 0.3% eyed.

The US session holds only second tier data on the docket and much of the action will depend on how the market interprets Fed Chairwoman Yellen’s remarks one day after the FOMC meeting. The initial reaction was dollar positive, but the net takeaway from the meeting was that the Fed will delay any moves until mid 2015 the earliest. That suggests that the dollar rally may see a pause especially if US data proves to be disappointing today.

Boris Schlossberg
Managing Director

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