It’s near impossible to keep a good thing down – the dollar seems to have found the error of its ways after a somewhat disappointing non-farm payroll report last Friday. Today’s partial market holiday in the U.S, Canada and France could add further spice to an already thin market. In a somber day of light trading, the mighty “buck” has found firmer footing across the board, recovering from its post payroll dip, printing fresh seven-year highs against the yen as a recovery in U.S yields aid the dollars move. The U.S dollar has rallied for much of the past two-months on improved economic data and forecasts of higher future interest rates. Firmer U.S yields make the “buck” more attractive, and further boost the returns on dollar denominated investments.
USD/JPY (¥116.00) has been aided in its cause following news that a planned sales tax may be postponed and snap elections called in Japan. The U.S dollars meteoric rise is expected for a breather soon, nevertheless, the dollar’s trend remains your friend with deeper gains beyond ¥116 leading to more short-term erratic moves. The technicians will argue that a daily close above ¥115.95 will be required to resume the currency pair’s short-term momentum. This current move has obviously negated the damage seen post-payrolls, and signals the markets resumption of the greater uptrend towards ¥118.00. Expect the crosses such as GBP/JPY (£183.80) and EUR/JPY (€143.85) to aid in the yen’s demise.
The Nikkei has also managed to print new multi-year highs closing up +2.1% in overnight trading, following in the S&P’s footsteps from yesterday’s session. While EUR/CHF remains under tenterhooks, printing a fresh 22-month low (€1.2022) overnight ahead of the end-of-month Swiss Gold referendum.
A handful of traders have been ignoring that rule and are quietly buying CHF, three weeks ahead of a SNB referendum that could force the Swiss central bank to “rip apart its monetary policy rules.” The date of the vote on whether the SNB will be required to hold +20% of its reserves in gold. The EUR/CHF (€1.2025) currently sits atop of its 26-month low – the highly publicized lower limit that has been guarded by the SNB (€1.2000). This is the psychological “line in the sand” that Swiss central banker’s declared that under no circumstance would be breached, a policy that was introduced three-years ago to prevent the market from trading a ‘stronger’ CHF.
The Swiss public go to the polls on November 30. A “yes” vote result will force the SNB to hold 20% of its assets in gold, which it would be then unable to sell. This complicates the SNB’s usual policy of buying EUR’s whenever the regional currency weakens too quickly or too far. Under the new rules (if voted in), would require the SNB to buy gold to balance any EUR purchases. It’s no wonder that Swiss policy makers oppose this particular motion as it would “tie policy makers hands” when trying to conduct standard monetary policy.
There is added pressure on the SNB to defend, especially with the ECB expanding its balance sheet and looking at other assets it can purchase, within its mandate – the downward pressure should be expected to increase, and by default, even more pressure will indirectly be put on the SNB. A “yes” vote will would only invite more aggressive speculation – the SNB would be left with few teeth to weaken the CHF.
After adopting ZIRP last month (zero-interest rate policy), the Swedish Riksbank, like Draghi’s ECB, remains sensitive to the fact that its inflation problems are not moving higher despite the inducements. The latest inflation print reveals a slightly stronger headline reading of -0.1%, y/y, vs. -0.4% previously. The core (+0.6% vs. +0.3%) was even better, nevertheless, like all Central Bankers one economic release does not make a trend, therefore the report should not be viewed in isolation. Currently, the market does not seem to be betting on the revealing of additional measures at next months Riksbank’s meet (December 16), but prudently are expected to keep the door ajar to further monetary easing. Like other prudent policy makers, the Riksbank is expected to focus on forward guidance and lower rate path before undergoing further action.
It’s inflation situation day in the U.K tomorrow with the BoE’s Governor Carney set to release and answer questions on the Quarterly Inflation Report mid-morning (QIR). The forecasts are expected to validate the markets expectations of a “first” rate hike mid-year 2015 (after the Fed). The report will also assess the current state of the U.K’s economy.
Thus far, the market has revised downwardly revisions to both employment and inflation mostly on the back of some weaker data over the past quarter – will they be vindicated by Carney’s presentation? There is a possibility, due to looser monetary policy, that Carney and company may actually push up their medium-term inflation forecasts – other Central Bankers would like to have this issue – making Carney’s report not as “dovish” as the market seems to be pricing in. Be forewarned, if that is the case, then sterling has some catching up to do!
