Market Drivers for December 18, 2014
Europe and Asia
CHF: SNB -25bp
EUR: GE IFO 105.5 vs. 105.5
GBP: UK Retail Sales 1.6% vs
North America
USD: Weekly Jobless 8:30
USD: Philly Fed 10:00
It's been a night of unexpected moves in the currency market as the Swiss National Bank went to negative rates cutting the benchmark rate to -25 basis points in order to defend its floor of 1.2000 on the EUR/CHF exchange rate.
Ever since the SNB failed to deliver the negative rate decision at its last meeting, the market has been pushing the EUR/CHF lower in an attempt to test the mettle of the central bank. The pair spent the last three days hovering at 1.2010, within just 10 points of the key support level. In addition the currency crisis in Russia may have accelerated the demand for the safe haven harbor of the Swiss franc and if the ruble continues to depreciate, the Swissie could see further capital flows from that region. The SNB therefore decided that it had no choice but to defend the position by going to negative rates today.
The central bank reaffirmed its commitment to defending the barrier and noted that it was prepared to take further measures if necessary including buying up unlimited amounts of euro if needed.
The move initially spiked the EUR/CHF to 1.2097 but it quickly gave up half its gains and traded at 1.2040 by mid morning European dealing. The retreat from the highs is telling as it suggests that the market remains skeptical of the SNB's ability to maintain this level in perpetuity. European monetary authorities have been making ongoing remarks that the ECB intends to commit to a full QE program at the start of the new year and if it were to do so, that would bring fresh downward pressure on the EUR/CHF cross.
In short, despite the negative interest rates and the unambiguous rhetoric, the EUR/CHF cross remains under pressure, especially if geopolitical tensions escalate into the new year. In his state of the union address today, Russian President Vladimir Putin appeared utterly unrepentant for the events of the past week and used blustery language that seemed to unnerve the market sending the USD/RUB - which dropped to 55.00 earlier in the day - back to 62.00 as traders saw no serious policy initiatives to deal with the current crisis.
Elsewhere the economic news was completely overshadowed by the geopolitical events as the EUR/USD essentially ignored a slightly better than expected IFO and cable quickly gave up its gains after UK Retail Sales printed at 1.6% versus 0.3% eyed.
The US session holds only second tier data on the docket and much of the action will depend on how the market interprets Fed Chairwoman Yellen's remarks one day after the FOMC meeting. The initial reaction was dollar positive, but the net takeaway from the meeting was that the Fed will delay any moves until mid 2015 at the earliest. That suggests that the dollar rally may see a pause, especially if today's US data proves to be disappointing.