Banks, hedge funds, traders and brokers affected by SNB surprise move; SNB lost over 60 bln by removing the CHF/EUR floor; Greek's go to the polls

By Ian Dobbs*:

The biggest development in the world of forex over the holiday period was the surprise announcement from the Swiss National Bank (SNB) last Thursday that it had abandoned the 1.20 floor it had set in EUR/CHF. The floor was put in place in 2011 to stop the CHF appreciating too much on the back of safe haven flows going into the currency during the Euro crises. The removal of the floor was a massive surprise and the volatility that followed flowed into all currency pairs.

Only three days prior on Jan 12th, the vice president of the SNB was quoted in the press as saying the minimum exchange rate “must remain as the cornerstone of our monetary policy.” It seems they had a rapid change of heart and the 1.20 floor no longer became tenable. The CHF instantly appreciated trading up 30% against the EUR at one point, before settling closer to +20%.

The SNB have lost in excess of 60 billion on the currency position they amassed while defending the floor, while some banks, hedge funds, traders and broking houses have also been caught by the move.

All this comes just ahead of what could be a very big week for Europe.

On Thursday night the European Central Bank are expected to finally announce a programme of quantitative easing to help ward off the threat of deflation.

Then on the weekend Greek voters go the polls to elect a new government and all indications are pointing to the Syriza party as likely victors. The Syriza party are anti austerity and have said they will try to renegotiate the bailout conditions. The risk of a Greek exit from the Euro will increase dramatically should they win power.

Major Announcements last week:

• UK Inflation 0.5% vs 0.7% expected

• US Retail Sales -0.9% vs 0.2% expected

• Australian Employment Change +37.4k vs +5.3k expected

• SNB removes 1.20 floor in the EUR/CHF

• US Inflation -0.4% vs -0.3% expected

• US consumer Sentiment 98.2 vs 94.2 expected

• Chinese GDP 7.3% vs 7.2% expected

NZD/USD

NZD/AUD (AUD/NZD)

The New Zealand dollar saw a sharp appreciation against the Australian dollar throughout November and December with the NZD peaking at 0.9659 (1.0353) in early January. This move was driven by increasing expectations of divergent monetary policy. The RBNZ still suggesting rate hikes are likely in the future, while in Australia the market is pricing in a significant chance of a rate cut this year. Although some commentators are expecting a rate cut from the RBA when they meet in a couple of weeks, the more likely scenario is that any potential cut will come later in the year. Data from both countries between now and then will dictate whether the NZD makes further gains, or whether we see a pull back toward key support around 0.9200 (resistance 1.0870). Looking much shorter term, there is immediate support around the 0.9400 (resistance 1.0640) level and while the market holds ahead of there further NZ dollar investigations higher cannot be ruled out. On a historical bases the current level still provides good value buying of Australian dollars with NZD and those looking to lock  a rate in should take advantage of any periods of strength over 0.9500 (weakness below 1.0525). NZ inflation data tomorrow will be of immediate interest, while from Australia we have consumer sentiment data and inflation expectations set for release over the coming days.

NZD/GBP (GBP/NZD)

The UK Pound saw a surprising amount of pressure in the first week of this year and combined with some relative strength in the New Zealand dollar, the cross briefly traded just shy of 0.5200 (1.9230). Soft UK data obviously had some impact, but it seems more likely the selling of UK Pounds was just flow related and the impact was exaggerated due to the thin liquidity at that time of year. The pair quickly turned around and corrected all the way toward 0.5050 (1.9800) before last Thursday’s Swiss National Bank announcement. In the wake of that central bank surprise positions in many currencies were cut / trimmed and this benefited the NZD much more than the GBP. At a result the pair lept back up above 0.5150 (below 1.9420) again. It currently trades just below 0.5150 (1.9420) and we believe these levels offer good value selling of NZD’s for GBP’s. Tonight we have the latest dairy auction from Fonterra and tomorrow we get NZ inflation data. From the UK this week we have employment and wage data along with the BOE minutes on Wednesday, then on Friday we have the latest reading from retails sales.

 NZD/CAD

The past few weeks have seen the New Zealand dollar make significant gains against the CAD. This move has been driven in large part by weakness in the Canadian dollar that has continued to suffer at the hands of weak oil prices. A rash of softer than expected data from Canada also didn’t help and as a result the NZDCAD cross traded all the way up to 0.9403 late last week. The cross has moderated since then back under 0.9300 and we could easily see it fall further to key support around 0.9200. A move below 0.9200 would turn the outlook somewhat negative, but until then potential for further gains exists. Tonight’s dairy auction from Fonterra will draw focus locally, as will tomorrow’s NZ inflation data. Canada has a big week for data with manufacturing sales, wholesale sales, the Bank of Canada rate statement, inflation and retails sales are all set for release.

NZD/EURO (EURO/NZD)

The Euro has seen relentless pressure since mid-December and this has been the key force driving the NZDEUR cross up over 0.6700 (EURNZD under 1.4925). This pressure has come on the back of increasing expectation that the ECB will announce quantitative easing (QE) measures at this week’s meeting. Almost all market participants now expect that announcement to come on Thursday evening and the real interest will be in the size of the programme and how it is structured. A significant programme in excess of EUR 500 bln should keep pressure on the EUR. Greek concerns have also weighed on the Euro and that country goes to the polls this weekend in what could be a key victory for the anti-austerity Syriza party. The ramifications of a Syriza win could end up being as dramatic as a Greek exit from the Euro, although most expect some middle ground to be met between Troika and the potential new government. The main takeaway from all of this is that there is still plenty of potential for serious volatility in the EUR with the risks skewed to further weakness. Initial support come in around 0.6600 (resistance 1.5150) and while above that level the NZD topside remains in focus. Tonight we have the latest dairy auction from Fonterra and tomorrow we get NZ inflation data while in Europe all eyes will be on Thursday’s ECB meeting.

 NZD/YEN

Volatility in the wider financial markets has been the main driver of this pair over the past few weeks. The Japanese Yen has benefited from safe haven flows during these periods of heightened volatility and this has driven the NZDJPY cross into the lower part of the 90.00 to 94.00 range that has dominated trading since mid-November. That range looks set to remain firmly in play for the time being. Tonight we have the latest dairy auction from Fonterra and tomorrow we get NZ inflation data while from Japan this week we have the BOJ meeting and then monthly report to digest.

AUD/USD

The Australian dollar saw plenty of pressure from the USD throughout December and in the early stages of January the pair traded to a low of 0.8033. Since then we have seen choppy trading conditions between that level and 0.8294 on the topside. That high was very short lived and only came on the back of broad position squaring in the wake of the surprise Swiss National Bank announcement. Discounting that move, the resistance around 0.8250 seems a more reasonable topside barrier at the moment. Although Australia produced impressive employment data last week, there is still expectation from some forecasters that we could see a rate cut from the RBA at their meeting on February 3rd. This will only serve to strengthen the topside resistance and further investigations below 0.8100 look likely over the coming weeks. From the United States this week we have building permits, housing starts, weekly unemployment claims and manufacturing PMI data to digest. While from Australia we get consumer sentiment data tomorrow and inflation expectations on Thursday.

AUD/GBP (GBP/AUD)                            

The UK pound came under heavy selling pressure in the first week of this year which helped drive the pair back up over 0.5400 (under 1.8519). Softer than expected UK data and a very heavy Euro no doubt weighed on the Pound, but the selling seemed somewhat out of proportion for those factors alone. The likely scenario is that the selling was largely flow related and the impact was exaggerated due to the thin liquidity at that time of year. The pair began to retrace back toward 0.5300 (1.8868) before the Swiss National Bank threw markets into a spin with their surprise announcement. The resulting volatility drove the pair back up over 0.5400 (under 1.8519) where it currently sits. There is resistance around 0.5450 (support at 1.8349) and while the market trades below there the risks are skewed to a pullback toward 0.5350 (1.8692). From Australia over the coming days we have consumer sentiment and inflation expectations data to digest. From the UK we get employment and wage data along with the BOE minutes on Wednesday, then on Friday we have the latest reading from retails sales.

AUD/EURO (EURO/AUD)

It has been mostly one way traffic for this pair since mid-December, with persistent Euro weakness driving the cross higher. The pressure on the Euro has come on the back of increasing expectation that the ECB will announce quantitative easing measures at this week’s meeting. Almost all market participants now expect that announcement to come on Thursday evening and the real interest will be in the size of the programme and how it is structured. A significant programme in excess of EUR 500 bln should keep pressure on the EUR. Greek concerns have also weighed on the Euro and that country goes to the polls this weekend in what could be a key victory for the anti-austerity Syriza party. The ramifications of a Syriza win could end up being as dramatic as a Greek exit from the Euro, although most expect some middle ground to be met between Troika and the potential new government. The only thing that is certain is that there is still plenty of potential for further volatility in the Euro. Key support comes in around 0.6900 (resistance at 1.4493) and while the market trades above there, the risks remain skewed to the topside. From Australia over the coming days we have consumer sentiment and inflation expectations data to digest, but the main focus will be on Thursday’s ECB announcement.

AUD/YEN

Volatility in the wider financial markets has been the main driver of this pair over the past few weeks. The Japanese Yen has benefited from safe haven flows during these periods of heightened volatility and this has helped drive the AUDJPY cross down below 96.00 on a number of occasions. The immediate risks remain skewed to the downside although there is strong support toward the 94.00 level and this should contain any periods of near term weakness. From Australia over the coming days we have consumer sentiment and inflation expectations data to digest, while from Japan this week we have the BOJ meeting and then monthly report to draw focus.

AUD/CAD

The past few weeks has seen the Canadian dollar under all sorts of pressure thanks to continued weakness in oil prices, and rash of softer than expected data. These factors helped to drive the AUDCAD cross close to 0.9900 before it ran out of steam. The resulting pullback has only made it to just under 0.9800 however, and this keeps the risk of further gains very real. Key support comes in around 0.9700 and it would take a move below there to turn the near term outlook negative. Canada has a big week for data this week with manufacturing sales, wholesale sales, the Bank of Canada rate statement, inflation and retails sales are all set for release. While from Australia we have consumer sentiment and inflation expectations to draw focus.

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