Swiss Central Bank Takes Another Swipe at the EUR

As most of the east coast of the U.S. focuses on the “historic” snowstorm of all proportions, rumored Swiss National Bank (SNB) action during the European session this morning has taken a swipe at the EUR bear.

Investors quickly priced in last Sunday’s Greek parliamentary results. In turn, the single unit sunk to a new 11-year record low outright (€1.1098). Once completed, the most vulnerable side for the EUR bear was always going to be the weaker short-EUR positions. The longer that the market was unable to break through key EUR support levels (€1.1000), the more vulnerable the EUR topside was going to become.

Of late, capital markets have not seen too much asset class price consolidation. The various asset price moves have been mostly fueled by fundamental data and event risk, accumulating in one directional and overcrowded positions. Currency pairs like the EUR/USD, GBP/USD, and AUD/CAD seem to be treading water. Not helping the EUR bear is the combination of stabilizing equity markets and U.S. and German bond yields holding above recent lows — they’ve managed to lift market risk appetite and weigh on the USD, for a short period at least.

Pros Happy to Recycle EURs

A large percentage of pro traders would have taken yesterday’s EUR fall as an opportunity to lighten up on their EUR short positions. Many have been hoping to recycle EURs at higher levels to improve their portfolio average while maintaining their core short views. The mention of the SNB rumors this morning has helped their cause. Despite the SNB’s credibility in policy setting having been tarnished after the franc flash crash, the central bank’s reputation in aggressively acting on FX and interest rates will always be feared by the market. The very fact that intervention was even uttered had the Swiss franc on the immediate move this morning. The key is whether it’s sustainable.

The CHF weakened ($1.0340) throughout most of the European session after SNB’s Vice President Jean-Pierre Danthine noted that the bank is prepared to intervene in FX markets as they have yet to stabilize. Dealers have been suggesting that the weak rise in sight deposits could be seen as an indication that the SNB has been in the market already this week after its de-pegging announcement two weeks ago. As the market heads stateside where trading is expected to be lighter, the CHF was well off its worst levels.

Commodity Price Divergence

The CAD, or loonie as the Canadian dollar is known, is trying to bounce off its six-year lows as crude oil prices reverse some of this year’s recent losses. The temporary rise in crude prices have been supported by a report that the Organization of the Petroleum Exporting Countries’ (OPEC) top officials believe that they may have hit a bottom. In other words, the oil cartel is trying to walk the commodity’s prices higher. The problem is that the officials’ argument does not trump the reality of a product glut.

Oil prices have been the loonie’s biggest driver year-to-date. If crude prices do happen to stabilize (down -55% over the past six months) then the CAD is expected to find some much needed help. Last week, the Bank of Canada’s Governor Stephen Poloz tried to play catch up with weaker commodity prices by slashing overnight interest rates (-0.25bps to +0.75%), citing his actions as an insurance policy against a collapse in crude prices.

With Canada being a commodity-sensitive exporter, any negative longer-term fluctuations in commodity prices will have a massive impact on Canadian growth and inflation, and so too do yield spreads. Wider U.S.-CAD bond yield spreads will always hurt the loonie. Technically, the USD has found resistance at the key $1.25 level. Nevertheless, the majority of investors remain better buyers of USDs on pullbacks, believing that the USD bull market and weaker commodity trend remains intact. Through $1.25, the CAD bear will hone in on the next major CAD support level at $1.30 rather quickly.

Gold Bugs Seek Consistent Momentum

Crude is not the only commodity making waves, yesterday gold futures fell the most this year on speculation that Greece’s anti-austerity party victory would not result in the country leaving the euro currency bloc, pressing demand for the safe-haven asset. The EUR rebounded from its 11-year low (€1.1098) in Asian trading on Monday, after new Greek Prime Minister Alexis Tsipras pledged to keep his country in the eurozone. In January, the yellow metal’s rise was supported by investors as Europe’s flagging economy drove demand for a store-of-value. The commodity is finding it difficult to hold a trend intact. Gold is at the big dollar’s mercy and the market’s whim toward risk or not.

Debt Auction No Match for East Coast Weather Bomb

Investors who want to buy new U.S. two-year paper will have to wait until tomorrow. The U.S. Treasury has rescheduled this week’s debt offerings due the current east coast weather conditions. The $26B 2’s and $15B floating rate maturities will take place at the same time tomorrow. The five-year $35B auction gets pushed to Thursday, ahead of the on-schedule $29B seven-year note sale.

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