Central Banks Decisions Support FX Direction

Central banks announcements and loan program results are again dominating capital market direction. A surprise interest rate cut, an expected rate hike, some misinterpreted bullish rhetoric, and deflation concerns have succeeded in supporting some of this morning’s bigger forex moves. Meanwhile, further squeezing of dollar stop-losses slowed some investor bleeding with the U.S. dollar clawing back lost territory to the yen (¥118.76) on Thursday.

Kiwi Dollar Jumps on Wheeler’s Remarks

The Reserve Bank of New Zealand (RBNZ) did as expected and left the official cash rate on hold at +3.50%, while lowering its 90-day bill rate from earlier forecasts by -10bps at 2014-end, -30bps at 2015-end, and -40bps at 2016-end. Governor Graeme Wheeler reiterated the high exchange rate still “restrains growth in the traded sectors” and has yet to adjust “materially to the lower commodity prices,” but he also added that “some further policy tightening will be necessary to keep future average inflation near the +2% target mid-point and ensure that the economic expansion can be sustained.”

As investors were anticipating a decidedly “neutral” bias from the RBNZ due to recent pressure in dairy prices and lower inflation expectations, the governor’s comments allowed the Kiwi dollar to initially spike outright (NZD$0.7863). Nevertheless, during the obligatory press conference, Wheeler was able to temper the market’s bullish sentiment by clarifying that the bank “would be on hold for a long time.” The investors that managed to interpret the statement as a tightening signal have since reversed those initial positions, and limited their losses (NZD$0.7782).

Swiss Wary of Inflation Risks

The percentage of the market that was looking for some telltale signs from Swiss policymakers on providing additional measures were surely disappointed by this morning’s policy announcement. Like any conservative bank, the Swiss National Bank (SNB) basically stuck to its anticipated script despite further substantial downward revisions to its inflation forecasts. However, the one material change to their copy was the mention that “deflation risks have increased once again.” (2015 is now seen at -0.1%, down from +0.2% in September.) Investors should be expecting the global deflation chatter to become louder among the major central banks in the new year.

Regarding the EUR/CHF “floor,” analysts expect it to remain the main channel for the SNB to take action. However, it seems to be more of a defensive rather than offensive approach. Like other central banks, investors should be anticipating a defensive move by the SNB if inflation continues to move lower, even as early as next month’s meeting (€1.2015). But being on the back foot, Swiss policymakers will have to act outside the box.

Norges Bank Kicks the Kroner Hard

All NOK bears (€9.0300 — down -7.5% versus the EUR year-to-date) got an early Xmas gift from the Norges Bank this morning. The gift? A surprise interest rate cut to +1.25% from +1.5%. Policymakers now expect to keep rates at or somewhat lower until the end of 2016. They believe it’s a necessary move on the back of slowing domestic growth and plummeting crude oil prices ($64.20). These actions have allowed the NOK to slump to a new five-year low. The Norwegian economy has been very much isolated from the eurozone’s woes, with an economy supported by the petroleum industry. However, falling crude prices are obviously raising questions about the outlook for the Nordic nation and central bankers do not like what they see.

Central Bank of Russia Hikes Rates in Vain

It’s no real surprise to see the Central Bank of Russia (CBR) raise interest rates by one percentage point (+10.5%). The question is whether it will work, as Russian policymakers try to rein in inflation, and halt a prolonged slide in the RUB (new record lows $55.20). The currency has fallen -40% outright this year and the rate hike is lower than many analysts had been anticipating. This would suggest that new record lows could be on the horizon, supported by lower crude prices and European and American sanctions. Throw in some end-of-year USD debt repayments, and investors have more support for this trend.

Draghi’s QE Vision Sharpens

This morning’s European Central Bank (ECB) loan allotment results (€129.8B in four-year loans) are considered small and raises the odds the ECB will pull the trigger on a quantitative easing (QE) program in the first quarter. With the so-called targeted longer-term refinancing operation failing to expand the central bank’s balance sheet, the weak demand simply suggests stronger financial institutions do not need cheap or free money. ECB chief Mario Draghi and company will now be pressed to purchase other assets including sovereign bonds if they want to raise the bank’s balance sheet by €1T.

This morning’s result is not a barrier to QE, nor is it a big enough miss to support a larger negative EUR move (€1.2453) just yet. With year-end timing an issue, do not be surprised to see speculators wanting to pick-up EURs on dips as a chance to cover or protect some of their profits. Even year-end squaring (USD selling) should be capable of providing the EUR some support.

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