Weekly FX Market Update - No Mas
The CHF turned in, not only its best performance in the week, but its best performance in modern history. The euro was at the back of the pack largely due to the fallout from the surprise move by the Swiss National Bank (SNB). The yen was up as the yen carry trade continued to unwind due to the continued downward move in global equities. The only reason the CAD didn’t finish last was because the SNB’s policy decision was more of a negative for the euro.
The SNB’s decision to abandon its currency cap against the euro on Thursday was reminiscent of one of the most famous fights in boxing history between Roberto Duran and Sugar Ray Leonard on November 25, 1980. At the end of round eight Duran turned away from Leonard and moved towards the referee and quit the match by saying, "No mas", which means "no more" in Spanish. The SNB’s policy of not letting the Swiss franc appreciate beyond the level of SFr1.20 per euro had been in place since September of 2011. They maintained this cap by printing unlimited amounts of francs and intervening in the currency markets by buying euros. This policy had caused the SNB’s balance sheet to balloon and represented 86% of Switzerland’s gross domestic product — far higher than the Bank of Japan (60%) or the Federal Reserve (25%). Why end the cap now? – the SNB must have been overwhelmingly convinced that the European Central Bank was going to announce Quantitative Easing (QE) next week. QE by the ECB will weaken the euro even more and the policy cap would require the SNB to buy even more euros so they threw in the towel and declared "no mas".
The SNB’s decision drove euro down by nearly 40% against the CHF at the onset and had broader ramifications in the forex markets. By all accounts, the decision qualified as a black swan event because no one expected the SNB to scrap their 3.5 year cap which means that investors had not bothered to guard against it.
It caused some substantial foreign exchange brokerages out of business. It remains to be seen if any systemically important institutions have suffered leveraged losses.
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USDCAD jumps 3 cents / 6 year high on surprise Bank of Canada rate cut
VBCE Daily Foreign Exchange Update for Wednesday, Jan. 21st,
2015
USDCAD spot rate: 1.2365 - 1.2370 (AS AT 8:50AM PST)
RANGES:
|
Asia:
|
1.2076
|
to
|
1.2114
|
Europe:
|
1.2078
|
to
|
1.2108
|
|
North America:
|
1.2063
|
to
|
1.2387
|
Technical Support / Resistance:
S2
|
S1
|
R1
|
R2
|
1.2065
|
1.2200
|
1.2387
|
1.2504
|
Key Economic Data Releases:
-Bank of Canada interest rate
decision: 0.75% (exp. unchanged @ 1.0%)
-http://www.bankofcanada.ca/2015/01/fad-press-release-2015-01-21/
-Canada wholesale sales: -0.3% (exp. -0.1%)
-U.S. building permits: 1.032
million (exp. 1.055 million)
-U.S. housing starts: 1.089
million (exp. 1.040 million)
Key Event Calendar:
DATE
|
CANADA
|
U.S.A.
|
Jan. 22
|
Jobless claims, housing price index
|
|
Jan. 23
|
CPI, retail sales
|
Markit mfg PMI, existing home sales
|
Yesterday, USDCAD traded from 1.1940 up to 1.2115, closing
the session near the highs. The close above 1.1984 after 6 consecutive failed
attempts to close above this key level opens the door for further upside from a
technical standpoint. Overnight, the pairing eased to 1.2063 ahead of the
7:00am Bank of Canada announcement. The BOC shocked markets with a surprise
rate cut sending USDCAD up to 1.2320. The pairing pulled back briefly to 1.2275
before climbing again to 1.2387 during the Bank of Canada press conference. The
pairing has since pulled back to 1.2350. The Bank cites concerns over weakness
in oil prices as the reason for the surprise move. The Bank comments that
“there is considerable uncertainty around the outlook…real GDP growth will slow
to about 1.50% and the output gap to widen in the first half of 2015.” The Bank
also believes that the “economy to gradually strengthen in the 2ND half of this year, with real GDP growth
averaging 2.1% in 2015 and 2.4% in 2016.” Currently, the TSX is up 1.90% while
the DJIA is up 0.30%. EURCAD is up 2.6% trading between 1.3957 and 1.4360.
GBPCAD is up 2% trading between 1.8213 and 1.8738. JPYCAD is up 3% trading
between 0.01018 and 0.01052. Gold is down 0.25% trading between $1,284 and
$1,305USD/oz, silver is unchanged trading between $17.91 and $18.48USD/oz,
while oil is up 2.30%, trading between $46.31 and $48.17.
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