Currency War Debate Alive after CHF Crash

The global currency war continues to rage no matter what central bankers tell us. The Swiss National Bank’s (SNB) dramatic move yesterday is probably a sign of things to come throughout the eurozone, as other national central banks prepare for the European Central Bank’s (ECB) potential shift in monetary policy in a matter of days.

Investors should keep an eye on the Danish National Bank as it is the most exposed to an ECB policy change with its currency pegged to the EUR. Even the Swedish Riksbank cannot afford a rise in its own currency given recent consumer-price index headlines indicating domestic prices are barely rising, and like most central banks, it too has an inflation target of +2%. Nevertheless, an aggressive ECB will put further pressure on the Riksbank to ease further to alleviate some of the pressure on SEK from a safer-haven perspective (EUR/SEK €9.4566).

The Last Central Bank Standing

The SNB, the last known buyer of EURs to artificially cap the value of the CHF, really had to do something. The possibility or probability of introducing a large-scale program of government bond purchases by the ECB would increase the supply of EURs, and thereby depreciate the single unit further. A materially weaker EUR made the continuation of the SNB’s currency ceiling unsustainable. The manner on how they went about it is something else and a debate on that will last a long time. On the flipside, the SNB’s desperate action could be an indication of how drastically it expects the EUR to depreciate. President Thomas Jordan and company were obviously not comfortable holding more EURs in front of such a potential quantitative easing (QE) move next week. But what the central bank achieved with the appreciation of the CHF, coupled with plummeting energy prices, is make it more difficult to hit its inflation targets, it damages the Swiss export market, and it steers the country toward a possible recession

SNB Actions Affects All Asset Classes

Single-handedly the SNB managed to send shockwaves through global markets this week as it abandoned its €1.20 EUR/CHF line in the sand first implemented three-and-half years ago. It also lowered interest rates on deposits further, a deterrent to parking cash with the central bank. The about-face by the Swiss authorities managed to push gold prices to a five-month high ($1,263) as investors sought sanctuary in the yellow metal.

This late week aftershock will be felt for a long time, if not for months, just as market participants prepare themselves for next week’s onslaught of diarized event risks. Not surprisingly, central banks again take center stage: the Bank of Japan and Bank of Canada. But the main focus will be the ECB and the possible implementation of sovereign debt bond-buying or QE. For months, a large percentage of the FX market has been pricing in that eventuality for January 22.

Will the ECB Disappoint?

Will ECB chief Mario Draghi and his fellow cohorts manage to deliver what the market has been pricing in over the past few months in particular? Will QE be finally tabled? If so, will the ECB’s monetary plans and initiatives go far enough to address the eurozone’s growth and lower inflation concerns? If he disappoints the market, Draghi will lose a considerable amount of street credibility very quickly, much like the SNB’s Jordan.

Following the January 22 ECB meeting is a crucial Greek parliamentary election on January 25. The possibility and disruption of a “Grexit” (a Greek exit from the eurozone) is top of mind.

SNB Action Felt Far and Wide

The SNB tsunami managed to spill over into Asia as the rising yen pummeled the Nikkei. At one point in the overnight session, the Japanese bourse was under the most extreme pressure, falling as much as -3% to a two-and-a-half-month low in the morning session, as investors fled the yen-funded carry trades in favor of U.S. Treasurys. USD/JPY hit one-month lows below ¥116, while EUR/JPY fell to a three-month low below ¥134.80.

In the other U.S. dollar majors, the single unit seems to want to consolidate the overnight losses to a +40pip range near $1.1600. Even USD/CHF has regained some composure, trading atop of $0.8760 as the market heads stateside to lick its wounds before closing out the week. U.S. inflation numbers and consumer sentiment will not allow the market to close out this week so quietly. Nevertheless, do not expect the market to go looking for trouble ahead of next week’s important announcements.

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