Swiss Franc Shocker May Make for Muted End to Trading Week

Talking Points:

FX Markets Set for Quiet Week-End as Traders Digest SNB’s Franc Shocker
US Dollar Unlikely to Face Pronounced Selling Pressure on Soft CPI Result
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A lackluster economic calendar in European trading hours is likely to fade from focus as battered traders digest the brutal volatility of the past 24 hours. The markets were understandably rattled after the Swiss National Bank unexpectedly scrapped its three-year-old Swiss Franc cap of 1.20 against the Euro, saying the “exceptional and temporary measure…is no longer justified.” EURCHF 24-hour realized volatility jumped to the highest level since at least 1971, swelling to nearly five times its previous peak (recorded in March 1995).

The announcement caught the collective FX space by surprise. IMF Managing Director Christine Lagarde seemed to deliver the understatement of the day, quipping in an interview with CNBC that she found it “a bit surprising” that SNB President Thomas Jordan did not inform her of the impending move and adding that “talking about it would be good.” Lagarde also held up the Federal Reserve under the stewardship of Janet Yellen as a positive contrast with the SNB’s approach, saying the US central bank chief is “communicating very clearly”.

On balance, the Franc cap disappeared almost as suddenly as it emerged in September 2011. Then too, the SNB acted without warning and sent markets scrambling before the dust eventually settled. Measuring the cumulative fallout from the Swiss unit’s surge may prove to be a protracted affair, with the full breadth of the various ripple effects likely to emerge over weeks and months rather than hours and days.

In the meantime, shell-shocked investors are unlikely to be willing to commit to a strong directional bias. This will probably make for a nervously quiet end to the trading week. December’s US CPI report amounts to the most significant bit of noteworthy event risk. The headline year-on-year wholesale inflation rate is seen edging down to 0.7 percent, the lowest since October 2009. The soft result may not yield significant downside pressure on the US Dollar however.

The core CPI reading (which excludes the impact of energy prices) is seen registering at 1.7 percent, unchanged from November. This suggests the Federal Reserve may continue chalking up weak headline inflation to the transitory impact of dropping crude oil prices, meaning it won’t necessarily interpret the weak headline number as reason enough to delay interest rate hikes. Needless to say, an upside surprise on the core reading akin to yesterday’s PPI print would only reinforce this narrative.

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Asia Session

GMT

CCY

EVENT

ACT

EXP

23:50

JPY

Tertiary Industry Index (MoM) (NOV)

0.2%

-0.1%

2:00

NZD

Non Resident Bond Holdings (DEC)

65.0%

–

66.5%

European Session

GMT

CCY

EVENT

EXP

IMPACT