16 January, 2015
EURUSD has continued to fall on Friday and made a fresh 12 year low today at 1.1576. The recovery is tepid so far, as the market continues to choke over the SNB news. As we mentioned HERE yesterday, the problem for the EUR is twofold: 1, the SNB is no longer the EUR buyer of last resort since it abandoned its peg. 2, it makes it likely that the ECB will embark on some form of QE next week, and may even embark on a double whammy, a further cut to deposit rates, which could seriously wound the single currency.
The Fed’s next move:
The one thing that could stem the EUR’s decline today is the US CPI release. The headline CPI rate was slightly better than expected at 0.8%, vs. 0.7% expected, while the core rate was weaker than expected at 1.6% vs. 1.7%. While everyone expected prices to have fallen sharply last month, the big unknown is how the Fed will react. Can they really hike rates if prices are rising? Can they really point to a rate hike after the trauma caused by the SNB on Thursday?
Will the SNB move force the Fed to hold steady on a rate hike?
The SNB carnage could be a precursor of what to expect if the Fed withdraws its massive liquidity programme later this year. Perhaps Janet Yellen will wake up this morning wishing she had never cut out the phrase considerable time from the Fed statement. The SNB’s action is a wake- up call to all market participants of how the market can react when a central bank withdraws liquidity. The Fed needs to be extra careful.
The EUR’s reaction to the CPI data was muted; however the single currency could be cut some slack if the CPI data is weaker than expected and if the Fed backs away from the prospect of a rate hike in the aftermath of all this market volatility.
The technical view:
EURUSD remains below 1.16 and after such a sharp decline in the last 24 hours it looks like it is stretched to the downside, we also know that short positioning in the EUR is at extreme levels, so at some stage outsized EUR shorts may get squeezed. In the short term, 1.1650, today’s high, is ST resistance, ahead of 1.1750 then 1.1794 - the high before the SNB news hit the airwaves on Thursday. 1.1576 – today’s low – then 1.1550 – could stem the downside at this stage.
Right now the market is still in panic mode and EURCHF remains under pressure and has not been able to maintain gains above 1.0500 on Friday. This pair is still trying to find its new equilibrium, and without the SNB support it is looking fairly vulnerable. Eventually negative deposit rates should weigh on the Swissie, but policy shifts can take time to work through the market, so the Swissie may not reflect the rate cut for some time.
The yield spread: a positive signal for the EUR?
Interestingly, the German – US 10-year yield spread is at a 6-month high, which has not supported the EUR. This could be because Treasuries attracted safe haven flows on the back of the SNB move. But if, going forward, the decline in Treasury yields actually reflect some hesitancy on the part of the Fed to hike interest rates then we could see the EUR start to play catch up.
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