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By Gaurav Kashyap, Head of DGCX desk at Alpari ME DMCC
But perhaps the talking point from this past week was the Swiss National Bank's surprise decision to install a ceiling against the Euro. In a statement released last Wednesday, the SNB said it would aggressively purchase 'unlimited quantities' of the Euro in order to maintain the EURCHF rate at 1.20 or above.
Along with the Japanese Yen and the US Dollar, the Swiss Franc has basked in its safe haven status since the Lehman bankruptcy - the EURCHF has dropped from 1.60 levels to as low as parity levels over the past three years, and has dropped as aggressively as 27% in the last ten months. The continued strengthening of the Swiss Franc eventually began taking its toll on the Swiss economy, eroding growth and causing severe deflationary pressures.
Through past experiences it was evident that intervention wasn't an option - the SNB failed miserably in 2010 in trying to control its currency through intervention measures - the bank lost close to CHF 32.7bn when the Franc rallied from 1.48 levels against the Euro down to 1.24 levels. Through the most boldest of messages the SNB is sending out through this move, the message is that they are ready to do whatever is necessary to devalue its currency, whether it be through printing money or increasing its balance sheet through aggressive asset purchases.
Flight to Gold, Yen
What this action will do is reduce the demand for the Swiss Franc as a safe haven which will see a larger influx of demand for Gold and the Japanese Yen. As a currency, the Japanese Yen will be in even more demand during times of financial turmoil and deteriorating risk sentiment, and the Bank of Japan will be wary of its own currency getting too strong. In the long run, we could see some counter measures from the BOJ to protect their exporters from too strong of a Japanese Yen. The US Dollar will be well propped up against the Swiss Franc, 0.8250-0.8500 levels will present a very strong support in the pair and this move by the SNB will certainly speed up Gold's march past $2,000 a troy ounce.
EURUSD was battered in trading last week, finally breaking through that key 1.39-1.45 channel the pair seemed to have settled in over the past few months. Risk appetite in the pair took a big hit as the yield increased on Greek and Italian debt and as weaker than expected data from the EU showed that retail sales had slowed (MoM 0.2% act v 0.0% exp / 0.7% prev) and the overall EU economy contracted (YoY EU GDP 1.6% act v 1.7% exp / 1.7% prev). The Euro's smashed through the 200 day moving average of 1.4020 levels after the ECB decided to hold rates at 1.50% and Trichet cut growth forecasts for 2011/2012 and indicated that the downside risks to the Euro area had increased.
Aus, NZ, UK rates unchanged
The past week in trading also saw the rate decisions from the Reserve Bank of Australia and the Bank of Canada who held rates unchanged at 4.75% and 1.00% respectively. The Bank of England kept their rates at 0.50% with no changes in their QE plans. The Pound weakened in trading last week following a weaker industrial production reading (YoY -0.7% act v -04% exp / -0.3% prev) and weaker manufacturing reading.
Looking at the trading week ahead, we await the release of key inflation and employment data from the UK on Tuesday and Wednesday respectively, with inflation data due out from the US on Thursday.
Staff
