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Swiss shockwaves set to continue

NZForex

Monday 19th January 2015

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Swiss shockwaves set to continue

After the Swiss National Bank's shock decision to abandon the EUR/CHF floor saw volatility on a historic scale, Nick Tvedt from NZForex expects the shockwaves to continue this week.

Shock move on Swiss Franc...

• Last week was all about the Swiss Franc, as the Swiss National Bank rocked markets by abandoning their nearly three-year-old policy of supporting EUR/CHF at 1.20.
• CHF consequently appreciated sharply across the board, distorting flows and liquidity market wide. While this took the market entirely by surprise, the likelihood is that their hand would have been forced in the coming months by European Central Bank quantitative easing.
• The Swiss National Bank would likely not have enough ammo to maintain EURCHF at a level of their choosing in the face of the kind of EUR weakness that would inevitably result from Eurozone QE.

...and things are unlikely to settle down too much this week

• The European Central Bank’s meeting is the highlight this week, as the market currently expects the unveiling of a quantitative easing package in a bid to stem deflationary pressures in the Eurozone. Estimates of the amount vary, but somewhere in the region of EUR600bn is expected. Regardless, all roads seem to lead south for the EUR in the bigger picture.
• If the market considers the impending stimulus package to be too small to reverse what is now a deflationary spiral, the EUR must deteriorate from here. Similarly, the ECB cannot expand its balance sheet by an astronomical amount without resulting EUR weakness also.
• In spite of this, our view is that the market may well put in a short term knee jerk correction in the wake of the announcement to squeeze out some of the existing EUR sellers.

Offshore, Chinese data will be a key driver for NZD...

• China releases a raft of data tomorrow (Tuesday), all of which will be seen in the context of commodity demand.
• While oil has come off 50% in the last six months, much has been made of increased supply from the US shale boom. The demand side of the equation however largely centres on China.
• As global GDP forecasts continue to wane, the current state of the Chinese economy becomes all the more important for both commodities, the broader outlook for global growth, and consequently the NZD.

...while domestic outlook for monetary policy no longer supportive of NZD strength

• Economists have recently cut New Zealand’s 2015 inflation forecast by roughly half, pointing to a lengthy delay to the RBNZ’s next rate rise.
• Current market pricing suggests no change until December 2015, versus prior expectations of a rate hike in June.


Nick Tvedt is Senior FX Dealer at NZForex, New Zealand's leading international money transfer service and part of The OzForex Group (ASX:OFX). NZForex is a key provider of in depth commentary, forex news and insight as well as expert market analysis.



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