The Swiss franc has strengthened vs. the Euro (among others) as the SNB elected to take a wait and see approach to their monetary policy as they made no changes. This means that the interest rate is still at 0%, and that the target vs. Euro remains at 1.20.
There were some in the market who wanted to see them raise the target to 1.30 as franc strength has been hurting exports. There were also rumors being floated that perhaps they would consider negative interest rates. Neither action materialized so the franc moved higher as a result.
At this point, the economic data is beginning to weaken in Switzerland and inflation is not a problem as in fact they are seeing deflation. This situation looks eerily similar to what has occurred in Japan, and this will be a difficult cycle to break without major risks to the economy.
With the Euro debt crisis still providing risk to the markets, there may be a test of that 1.20 level at some point, especially if the Euro situation worsens. Will the SNB have the moxie to defend the 1.20 level? Stay tuned!
The financial markets can sometimes be described as creatures of habit so when the market is expecting some type of action and it doesn’t occur, it can lead to a snap-back. This appears to be taking place with the Swiss franc (CHF) today, as so far every Wendesday this month, teh Swiss National Bank (SNB) has “jaw-boned” the Franc lower.
What this means is that they have been out describing things that would potentially do to try to weaken the Franc and so far it has been largely successful. So when they failed to do so this morning, what happened?
Well the markets took this as a sign that maybe the jaw-bonig is over, so the bought the Franc despite the risk appetite in the markets this morning. Should the Franc stregthen further, expect the rhetoric to resume!
Investors are turning their attention to the Swiss Franc and are using US dollars to fund the purchases in a new round of carry trades. Switzerland was second only to Australia in dealing with the fall-out of the global recession, and its economy is now forecast to shrink less than half as much as the euro region this year – 1.9 percent compared with 4 percent according to the Organization for Economic Cooperation and Development.
“There’s very substantial underlying demand for Swissie, generated by one of the developed world’s largest current- account surpluses,” said Paul Meggyesi, a currency strategist in London at JPMorgan Chase & Co., which turned bullish on the franc Nov. 24. “I fail to see the economic emergency which will motivate the SNB to continue to offset that pressure with very substantial foreign-exchange purchases.”
Bloomberg
Abu Dhabi – Dubai’s largest stock market – lost a record 8.3 percent after Dubai’s finance minister, Abdulrahman al-Saleh, said that the government will not cover Dubai World’s mounting debts. According to BBC Middle East Reporter Ben Thompson, this statement is somewhat at odds with the commonly-held belief from many who invested in Dubai World, believing that the Dubai government would guarantee them.
BBC News
