The opening theme of the week is very much a product of both risk sentiment and central bank action. The CHF has been sold off with a vengeance as markets return to full strength today and we can only assume the investors are pulling their money out to seek improved yields as the SNB warn of further rate cuts should the need arise. With interests already deep in negative territory, the assumption was that the Swiss central bank would stick on current policy, with the deposit rate commanding a 0.75% premium to hold cash in CHF reserves. SNB’s Jordan last week said that rates could go lower still, and this has prompted the latest sell-off which has carried the USD rate to 1.0200 at time of writing. They also remain committed to intervene against CHF strength and we saw this in play in the mid 1.1100’s in EUR/CHF at the start of April.
The SNB will target the EUR rate with any smoothing operations (as many like to call it), as they would (as any other central bank in this situation) focus on their largest trading partners. As all longer-term market participants will remember, the central bank is and have been specific in their timing of any interventions, and the latest moves will serve as a buffer to the European election risk coming in May. The resilience of EUR/USD to recent data as well as upcoming events should consider this as a material factor in its support. This is conjecture to a large degree, but in a low vol environment, sizeable flow will naturally impact in clear sight.
Further afield, it seems prospective central bank perceptions are also playing their part. If one is to place confidence in the Chinese data of late, then AUD is the best proxy of this, yet we see a retreat in the spot rate back towards 0.7100, having failed to mount a serious attempt on the 0.7200 level last week. RBA projections of a rate cut have been spreading fast, just as they have for the RBNZ, with the NZD/USD rate back under 0.6700 again and eyeing a move towards the flash crash lows seen at the start of the year.
The CAD is in the immediate line of fire as the BoC announce on rates tomorrow. While there is no change expected, there is a good chance that they will further walk back on their policy outlook. Having communicated a path of further hikes over the near term horizon, the global trade outlook may force them to take a softer line and pre-emptive CAD selling is taking this risk into account. Resistance above 1.3400 has been well documented on the charts, leading to a narrow range with parameters at 1.3300 on the downside briefly breached. We are back at the top end again today and a move to 1.3500 looks inevitable if the BoC deliver what many anticipate. Under the circumstances, higher oil prices are having little impact, much in the same way as firmer industrial metals have deviated away from AUD.
The SEK is also coming under fire today with the Riksbank still seen following the ECB rather than taking the lead in response to domestic pressures. Inflation will eventually have its say and I expect the SEK to outperform the EUR as accommodative policy in Sweden will kick in at some point and force the Riksbank’s hand – irrespective of what plays out for and at the ECB.
GBP is a waiting game at the moment, and valuations are a pure aggregation of the risks to the outcome of the Brexit process which has been delayed to Oct 31 at the latest. Growing speculation over Theresa May’s tenancy at No 10 has been a negative driver of the Pound of late, leading to the latest dip under 1.3000. Should 1.2950 give way, then 1.2900 and pre 1.2800 will again pose obstacles for sellers amid the uncertainty. It is somewhat unattractive to sell at current levels given Cable was expected to return to 1.5000-1.5500 levels in the event of the UK voting to stay in the EU in 2016, so even allowing for USD strength since then, 1.4000 is not an unreasonable reach in the event of a soft Brexit, which is still very much on the cards.
EUR/GBP will have to grapple with the upcoming risks as we have already discussed, so no longer represents the best way to express ones bearish outlook on the UK and/or Brexit outcomes. 0.8675-0.8725 remains a tough area of resistance, and a breakout of the upper level would represent a major fallout in GBP sentiment.
There is little to say on EUR/USD that has not been covered already. The EUR is a funding currency in the present day, and while future rate pricing leads one to believe the currency will catch up with the curve, now is not the time as yield seekers continue to reap the benefits of US rates.