Swiss Franc Sinks as SNB Surprises with Negative Interest Rates

Talking Points:

Swiss Franc Sank After SNB Unexpectedly Unveiled Negative Interest Rates
US Dollar May Turn Lower as Markets Rethink FOMC Outcome Implications
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The Swiss Franc slumped after the Swiss National Bank unexpectedly dropped interest rates into negative territory at -0.25 percent. The central bank warned it is ready to take further measures if needed and reaffirmed its commitment to the EURCHF floor at 1.20. The Australian and New Zealand Dollars edged higher as Asian stocks followed Wall Street higher, boosting demand for the sentiment-geared currencies. The Kiwi slightly outpaced its Oceanic counterpart, finding added support in an upbeat set of third-quarter New Zealand GDP figures. Output expanded 1 percent in the three months through September, topping consensus forecasts for a 0.7 percent increase.

The US Dollar may come under pressure following yesterday’s sharp advance as traders rethink the implications of the FOMC monetary policy announcement. The greenback’s rally was seemingly inspired by the Fed’s decision to back away from language pledging to keep rates low for a “considerable time following the end of its [QE3] asset purchase program”. Instead, policymakers adopted new verbiage arguing that the central bank can be “patient in beginning to normalize the stance of monetary policy”. The currency’s reaction seems to suggest this was interpreted as a hawkish guidance shift.

In fact, traders may have over-estimated the implications of the Fed’s language adjustment. The previous narrative was conditioned on the end of QE as a reference point. With that program already over for two months, an update was probably appropriate on purely contextual grounds and need not have signaled a policy change. Indeed, Yellen and company explicitly said that the new guidance is “consistent” with the old. Meanwhile, the FOMC trimmed the expected scope of rate hikes in 2015. The average view now envisions the outer band of the baseline rate range at 1.25 percent by the end of next year compared with 1.4 percent in September’s outlook.

Germany’s IFO Survey of business confidence headlines the economic calendar in European trading hours. Expectations call for the headline Business Climate index to rise to 105.5 in December, marking the second consecutive advance and the highest reading in four months. A pickup may offer a bit of a lift to the Euro but the move probably won’t find lasting follow-through considering improving sentiment could largely reflect expectations of on-coming ECB stimulus expansion. Needless to say, that seems hardly supportive for the single currency.

UK Retail Sales figures are set to reflect a slowdown in November, with the year-on-year growth rate down to 4.5 percent from the 4.6 percent reading posted in the prior month. Leading survey data paints a more optimistic picture however: an analogous private-sector measure from the BRC revealed the fastest receipts growth in three months over the same period while employment and household finance surveys from Markit Economics pointed to a fertile landscape for increased consumption. If these clues prove telling, an upside surprise may materialize. That has scope to offer a lift to the British Pound amid bets on the sooner arrival of BOE tightening.

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