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Foreign Exchange

SNB inaction triggers surge in Swiss franc

The Swiss franc put in its strongest performance since the Swiss National Bank imposed a floor of SFr1.20 in September, as traders cut short positions after the central bank held back from further action to weaken its currency.

Headlines • Swiss National Bank reaffirms commitment EURCHF floor at SFr1.20, saying it is prepared to buy foreign currency in unlimited quantities

• Fitch Ratings downgrades five European lenders by one notch, citing “stronger headwinds” in the industry

• Eurozone PMIs unexpectedly improved in December, with the manufacturing reading rising to 46.9 from 46.4 and the services reading to 48.3 from 47.5

• China “flash” PMI (HSBC/Markit) improves to 49.0 in December from final November figure of 47.7

• Foreign investors purchase net ¥932.4 billion of Japanese money market instruments in past week, according to MoF figures

• Japan’s Q4 Tankan survey drops more than expected to -4 from +2 in the September survey

Market reaction

The Swiss franc surged higher on Thursday after the Swiss National Bank left the floor in EURCHF at SFr1.20, confounding expectations in some quarters that it would move the threshold higher.

A recent run of disappointing Swiss economic data had prompted some to predict that the SNB would raise the floor to SFr1.25, or even SFr1.30 to shield its economy from the strength of the franc. EURCHF plunged to Sfr1.2250 on the news, having stood at SFr1.2395 at the start of trading in Asia.

Meanwhile, EURUSD continued to plumb fresh lows, hitting a trough of $1.2945, and EURGBP came under further pressure over continued concerns that the eurozone debt crisis was spiralling out of control. A downgrade of eurozone banks did little to help the single currency’s cause, helping EURJPY also to trade down towards its multi-year low for the year at just under ¥101.00.

Haven demand supported the dollar and the yen elsewhere, as equities in Asia came under heavy selling pressure despite better-than-expected activity data from China. Also helping the dollar and the yen were expectations of further compression in global interest rates, after Norway’s central bank cut rates by more than expected on Wednesday.

High beta currencies suffered, with the Australian, New Zealand and Canadian dollars losing ground, while the Norwegian krone and the Swedish krona also came under pressure.

USDJPY remained in a tight range around ¥78.00, as figures showed strong demand for Japanese assets.


EURCHF slumped after testing SFr1.24, as macro funds were heavy sellers ahead of the SNB’s policy announcement. With no change to the floor, EURCHF then dropped almost a big figure from SFr1.2355 to Sfr1.2257, as investors cut short Swissie positions in force.

In EURUSD, decent Asian demand in the high $1.29s helped EUR climb back above through $1.30, though the move was short-lived as real money selling was seen as London opened.

Options desks say the big option barriers at $1.30 and $1.2950 have been broken, though there are still downside barriers for the next three big figures.

Talk of a very large one-touch $1.29 option expiring on Friday may see moves down to the figure accelerate.

AUDUSD was unable to make it above parity, with intra-day sellers taking advantage of rallies above the $0.99 level.

USDJPY briefly traded above ¥78.00 before running into an overhang of exporter selling and strong interest from fund names.


Bank of New York Mellon’s iFlow FX indicators confirmed that the strong net selling of the euro from real money investors, witnessed in recent weeks, continued unabated.

The data showed there had now been 11 consecutive trading sessions of steady outflows from the euro, which have coincided with the fall in EURUSD below $1.30 from above $1.3550 at the start of the month.

The last time the data showed 10 consecutive days of strong and steady euro net selling was in September, which was accompanied by a 10-big-figure decline in EURUSD from $1.4386 to $1.3386.


FX vols opened with a broadly offered tone.

The EURUSD implied volatility curve was trading lower than yesterday, with the biggest change seen in one-month EURUSD vol, down 0.8 at 14.5. Three-month EURUSD vol traded at 15.75, down 0.15 from Wednesday, while one-year vol fell 0.15 to 16.

EURUSD risk reversals, however, remained unchanged from Wednesday, with one-month at -2.6, three-month at -3.55 and one-year at -4.13.

Unsurprisingly, shorted dated EURCHF vols have come off massively after the SNB disappointed speculators by maintaining the EURCHF floor at SFr1.20. One-week vol tumbled down 6 to 8.75, while one-month vol fell 1.25 to 8.60.

For investors who still believe EURCHF is a good buy at these lower spot levels at SFr 1.2200-50, the options market may now present value again.


Strong demand for dollar funding from European banks continues to be evident in the market, despite the move by global central banks to flood it with liquidity.

The European Central Bank reported that 12 banks took a total of $5.1 billion in one-week dollar loans on Wednesday. That was up from last week, when five banks took $1.6 billion.

Funding strains were reflected in the forwards market, with the benchmark EURUSD three-month cross currency basis swap showing an elevated premium to obtain dollar funding. The swap stood at -143 basis points on Thursday, within sight of the post-Lehman record of -162bp it hit before the injection of liquidity from global central banks earlier this month.

What to look for

The failure of the Swiss National Bank to raise the floor in EURCHF could represent a good buying opportunity.

Short-term accounts might have cut their positions in the currency pair, but data still points to further action from the SNB, especially if the situation in the eurozone were to stabilise. The SNB revised its growth and inflation targets lower, and figures prior to the announcement showed industrial production fell by more than expected in the third quarter.

The central bank, as well as stating it was prepared to buy unlimited amounts of foreign currency to defend the current SFr1.20 floor in EURCHF, said it stood ready to take further action if the economic outlook and the risk of deflation so required.

In the medium term, a rise in the floor to SFr1.25 or even Sfr1.30 still looks likely.

Spot, 6.30am, EST


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