It has been a wild ride in the forex markets this week, mainly because of the extraordinary volatility sparked by the Swiss National Bank's (SNB) decision yesterday to abandon its exchange rate cap.
By Peter Martin
Saturday, January 17, 2015
Friday has been more stable, but the market is still dealing with the fallout from the SNB’s surprise pronouncement.
The Swiss franc’s gains yesterday were breath-taking, appreciating roughly 40% against the euro at one point during the day, before finding some temporary equilibrium around 15% higher than the previous close. Some of those gains have been given back today: EUR/CHF was up 1.76% at 0.9950 by early afternoon in New York, while USD/CHF rose 2.37% to 0.8610.
The events of yesterday would seem to indicate just how jumpy the market is in regard to what might potentially come out of next Thursday’s ECB policy meeting. There is growing expectation that the central bank is prepared to introduce a scheme purchasing sovereign debt in the eurozone, and that looming issue of quantitative easing is pushing the euro ever lower.
EUR/USD slid 0.81% to 115.38, earlier touching an 11-year low of 1.1460, as the German magazine Spiegel ran a story suggesting ECB President Mario Draghi has informed German Chancellor Angela Merkel and Minister of Finance Wolfgang Schaeble of a plan for national central banks to purchase bonds issued by their own governments.
Consumer sentiment soars
Domestic macro data was upbeat on the whole today, particularly an indication of strong improvement in consumer spirits. The University of Michigan’s index of consumer sentiment surged to 98.2 in the flash reading for January, up from 93.6 in December, which is its highest level in over ten years. Improvements in the outlook for labor and income were cited amongst the reasons behind the gain, along with the sharp fall in the price of gasoline. It is a reasonable expectation that if consumers are feeling extremely confident about current and future economic conditions that they will be more inclined to spend more of their disposable income and today’s report should therefore boost expectations for consumer spending.
The low cost of gasoline, and energy in general, is one of the chief factors behind a drop in consumer inflation last month. The Consumer Price Index (CPI) declined 0.4% in December, following a drop of 0.3% in November, and this takes the year-on-year change to +0.7%. The decline was in line with expectations, though at the core level, which excludes the more volatile components of food and energy, prices were stagnant, with the index unchanged following a 0.1% rise in this core level in November. With inflation now well below target and appearing to shift lower, the Fed may be of a mind to delay any rate hike that was on the cards.
The Federal Reserve’s index of industrial production fell 0.1% in December, but beneath that headline level, there is some encouragement to be found in the manufacturing component, which advanced a better-than-expected 0.3% following a 1.3% leap in November. Anecdotal evidence garnered from the various manufacturing surveys has painted a mixed picture of the sector, but the hard data continues to look moderately upbeat.
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