New ground was made to the downside in EUR/CHF as predicted by some of our featured analysts last week. The move was further compounded at close of business Thursday by a speech by Jean-Pierre Danthine, a new member of the SNB’s board The most ear-catching line in the speech was that: “...households and firms should prepare themselves for a return, sometime in the future, to a world of higher interest rates, with exchange rates being guided by market forces.” That doesn’t mean that the SNB is no longer going to intervene if the CHF appreciates too sharply. But it does bring the 1.4000 target, detailed last week, into sharp focus.
Sterling’s squeeze upwards gained pace aided by housing data, jobs figures, more Tory-friendly polls and a PSBR that turned out less dire than expected. At the end of last week BNP Paribas caught the move well: “The market is short the pound, convinced already that the fiscal and economic situation spells doom. However, the one-way market suggests a squeeze higher above the 1.5200 level before the downtrend continues.”
At a breakfast briefing on Tuesday I met with Jane Foley, forex.com’s UK research director, to get her overview of the next quarter and beyond. While still negative on sterling, Foley is more bearish on the euro. Foley believes the ECB will not raise the refi rate until the fourth quarter of 2011; she points out that the EUR is still in the upper quartile of the ECB’s effective exchange rate and, with the likelihood being that the Fed will start tightening before year-end, believes EUR/USD could test 1.2200 at that time.
Everyone now seems to be focusing on the fact that, although German exports are the driving force behind European growth, Germany’s admirable productivity is as much a driver of eurozone imbalances as Club Med profligacy. During the week both France’s Christine Lagarde and the IMF’s Dominique Strauss-Kahn called on Bonn to stimulate domestic demand. It will take more than that to sway Germany from its path of prudence though.
FX research round-up: EUR/CHF in focus, apocalypse not-yet for GBP
March 12, 2010