Switzerland's franc again dominated trade on major currency markets on Thursday, falling as much as two percent against the euro and dollar amid renewed speculation of intervention by the Swiss National Bank. The franc sank to 1.0430 francs per euro in morning trade in Europe, by far its weakest since the SNB triggered the most violent move in a major currency in four decades by dumping its cap on the franc two weeks ago.
But as interesting for most players was the speculation that the SNB was also intervening in favour of the dollar, a shift which may allow it to battle the franc's broad strength at less overall cost. "Nobody actually knows that they are intervening, but the interesting thing is that everyone now expects them to use a basket rather than just the euro," said a senior trader with one international bank in London.
"Doing it more directly may be more effective." Morgan Stanley's head of European FX strategy Ian Stannard said he believed the Swiss were moving to a "dirty float" where they will intervene regularly under a framework built around a basket of currencies including the dollar, euro and others. He forecast the franc to weaken to 1.02 francs per dollar by the end of the year and the euro to 1.07, compared to 0.9091 and 1.0272 respectively on Thursday.
The other big movers in the European morning were the Australian and New Zealand dollars, suffering from expectations interest rates in both Antipodean economies will have to be eased to deal with poorer growth elsewhere. "For the NZ dollar, a further repricing of RBNZ rate expectations will imply a period of under performance against the G10 crosses, especially given that a number of markets have already undergone a significant repricing of policy expectations in recent months," J.P. Morgan analyst Sally Auld said.
The kiwi last traded at $0.7271, down 0.6 percent on the day and having hit a 4-year low of $0.7266. Against the yen, it hit a three-month low of 85.59 yen. The Aussie sank almost 1.5 percent to a 5-1/2-year low of $0.7773. Action on the three majors was muted, the US dollar inching higher against the yen and a touch lower against the euro after a Federal Reserve statement which, with some caveats, was read as keeping the bank on track to raise interest rates later this year.
There were hints from the Fed of concern about both the headwinds facing other major economies and an undershoot in inflation that might stay its hand somewhat longer than the mid-2015 timeline previously forecast by many. That prodded US bond yields lower, but the overall picture, of a steadily improving US economy while Europe and Japan remain mired in crisis, was left firmly intact. "For us, its the growth and yield differentials that are most important," Morgan Stanley's Stannard said. "By underlining 'international developments' the Fed is highlighting that process and the attraction of the US as an investment destination. That all plays in to dollar strength."
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