U.S. Dollar Insuppressible

It’s near impossible to keep a good thing down and the U.S. dollar is not exempt from that fact, having found its way again after a somewhat disappointing non-farm payroll (NFP) report last Friday. Today’s partial market holiday in the U.S., Canada, and France could add further spice to an already thin market. On a day of slender trading, the mighty buck has found firmer footing across the board, recovering from its post-NFP dip to print a fresh seven-year high against the yen as a recovery in U.S. yields aids the dollar’s 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.

Yen’s Sharp Fall a Cause for Concern

USD/JPY (¥116.00) has been aided in its cause following news that a planned sales tax may be postponed and an election called in Japan. The U.S. dollar’s meteoric rise can’t continue, nevertheless, the dollar’s trend remains your friend with deeper gains beyond ¥116.00 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-NFP, and signals the market’s resumption of the greater uptrend toward ¥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 multiyear highs closing up +2.1% in overnight trading, following in the S&P’s footsteps from yesterday’s session. Meanwhile, EUR/CHF remains on tenterhooks, printing a fresh 22-month low (€1.2022) overnight ahead of the end-of-month Swiss gold referendum.

Swiss Francs Fraught with Risk

A handful of traders have been ignoring the warning signs and are quietly buying CHF, three weeks ahead of a referendum that could force the Swiss National Bank (SNB) to “rip apart its monetary policy rules.” The November 30 vote will determine whether or not 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 bankers 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.

A “yes” vote 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), the SNB would be required to buy gold to balance any EUR purchases. It’s no wonder that Swiss policymakers oppose this particular motion as it would tie their hands when trying to conduct standard monetary policy.

There is added pressure on the SNB to defend its mandate, especially with the European Central Bank (ECB) expanding its balance sheet and looking at other assets it can purchase. The downward pressure should be expected to increase, and by default, even more pressure will be indirectly put on the SNB. A “yes” vote would also invite more aggressive speculation as the SNB would be left with few tools to weaken the CHF.

Riksbank Exudes Caution

After adopting ZIRP (zero-interest rate policy) last month, Sweden’s Riksbank, like the ECB, remains sensitive to the fact that its inflation problems are not moving higher despite the inducements. The latest Swedish inflation print reveals a slightly stronger headline reading of -0.1%, year-over-year, versus -0.4% previously. The core (+0.6% versus +0.3%) was even better; nevertheless, 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 Riksbank deploying additional measures at next month’s meet (December 16), but it is expected to keep the door ajar to further monetary easing. Like other prudent policymakers, the Riksbank is expected to focus on forward guidance and lower rate path before undergoing further action.

BoE Inflation Report Holds Sway

It’s inflation situation day in the U.K. tomorrow with Bank of England (BoE) Governor Mark Carney set to release and answer questions about the BoE’s Quarterly Inflation Report. The forecasts are expected to validate the market’s expectations of a rate hike mid-year 2015 (after the Federal Reserve). The report will also assess the current state of the U.K. 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 the market 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!

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments.
He has a deep understanding of market fundamentals and the impact of global events on capital markets.
He is respected among professional traders for his skilled analysis and career history as global head
of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean
has played an instrumental role in driving awareness of the forex market as an emerging asset class
for retail investors, as well as providing expert counsel to a number of internal teams on how to best
serve clients and industry stakeholders.
Dean Popplewell