- Dollar bulls require patience
- Norges Bank disappoints but looking to cut
- No clarity on currency intervention from SNB
- Greece remains in the frame
Many are hoping that it will be a calm close to a mad week that happened to see the Federal Reserve temper enthusiasm for U.S. growth with imminent policy changes. A few not-so-subtle dot-plot changes happened to spark the second-largest round trip move for the EUR since 2000 in a 24-hour period on Thursday (€1.0613-€1.1062).
For a considerable period of time the market has been so tightly wound, long U.S. dollars, some sort of correction was certainly overdue. The Street got the Fed’s ‘patient’ omission call correct midweek, but was completely surprised that policymakers were not more impressed by the improvements in the U.S. labor market. Investors had been operating under the assumption that the U.S. was at the Fed’s upper limit of full employment definition from last December (+5.5%). Nevertheless, due to the fact that the Fed has the capacity to shift the needle on the jobs front, this market was always going to get hurt by overt “dovishness,” temporarily at least.
Since the shakedown, there is very little to say about forex moves. The USD is now back trying to encroach on its pre-Federal Open Market Committee levels, while the CHF and NOK hold most of their gains made Thursday after both the Swiss National Bank (SNB) and Norges Bank left their respective cash rates unchanged. The ‘toing and froing’ within a relatively contained range to end the week is down to investors deliberating over the Fed’s timeline for higher U.S interest rates, and the pace of the “big” dollars expected appreciation over the longer term. The arguments for a strong dollar remain, but its the pace that’s most questionable.
Another Central Bank Surprise
Nearly everyone had expected the Norges Bank to cut its main interest rate to counter the adverse economic impact of a further fall in oil prices. Norwegian policymakers justified their decision to hold on the back of the relatively small effects of crude prices on the ‘real’ economy so far, and the continued rapid appreciation in house prices.
However, the central bank has clearly signaled that it would be lowering its key policy rate further. Its own forecast shows the policy rate falling to +1% by year-end (currently +1.25%) and staying there into 2018. The market was stunned, especially after last December’s pre-emptive strike (similar to the “one-and-done” policy thus far by the Reserve Bank of Australia and Bank of Canada for crude price fall insurance purposes). The fallout has seen a sharp rise in the NOK (€8.93 to €8.64), which will only be put further pressure on the Norwegian energy sector. Perhaps the Norges Bank will have to cut in May and go away? The prospect of a rate cut in either May or June is rather high, particularly if investors covet the NOK as a high yielding ‘carry’ trade.
SNB to Act Sooner Rather than Later
The SNB rate announcement went down with little fanfare. The market is still bitter over the SNB’s shock decision to abandon its CHF1.20 per EUR cap in January. The SNB decision to leave it’s deposit rates at -0.75% probably reflects the slight softening of the CHF (€1.0550) over the past few weeks. However, the currency pair remains at a historically high level, and close to the upper limit of €1.05-1.10 range, with which the SNB is “rumored” to be comfortable. In its press release, the SNB stated that the currency remains “significantly overvalued” and that it would “remain active in the foreign exchange market as necessary.” The currency’s appreciation has required Swiss policymakers to revise down their projections for growth and inflation, which now seems to be the “new” central bank theme.
Following the abandonment of the EUR/CHF floor, it has not been made clear by the SNB what exactly the objectives is of forex intervention, and Swiss policymakers do not seem to want to provide any further color on that process either. Assuming that eurozone growth remains weak, and the threat that a Grexit could become a reality, it should continue to put further pressure on the 19-member single unit. In turn we could see the CHF rally to the point of parity with the common currency. This threat will pressure the SNB to be intervening much sooner rather than later. But it’s a question of how aggressive the bank will be that the market should be most concerned about. Swiss policymakers have lost a lot of street credibility since their January shenanigans, and the market will take a long time to forgive.
On Tap for Next Week
It’s going to be very difficult to top market actions from this week for a long time. We begin next week with a few CPI releases, starting with Sunday’s Flash PMI from China. Hot on the heels will be Tuesday’s French and German PMI reports. Adding some spice will be the CPI reports on the same day from the U.K and U.S. Durable goods orders stateside will entertain us mid-week while U.K retail sales basically closes out the week on Thursday as there is no major releases on Friday.