Central Banks Decisions Support FX direction

Norges action surprises market

CBR too little too late

TLTRO results no barrier to QE

Dollar ‘squaring’ in vogue

Central banks announcements and loan program results (ECB TLTRO) are again dominating capital market direction. A surprise interest rate cut (Norges), an expected rate hike (CBR), some misinterpreted bullish rhetoric (RBNZ), and the uttering of a potential deflation concerns (SNB), have succeeded in supporting some of this morning’s bigger forex moves, while further squeezing of dollar stop-losses briefly stopped some of the investor bleeding (118.76).

‘Loss’ on words down-under

The Reserve Bank of New Zealand did what was expected and remained on hold at +3.50%, while lowering its 90-day bill rate from earlier forecasts by -10bps at 2014-end, -30bps at 2015-end, and -40bps at 2016-end. Governor Wheeler reiterated the high exchange rate still “restrains growth in the traded sectors” and has yet to adjust “materially to the lower commodity prices,” but also added that “some further policy tightening will be necessary to keep future average inflation near the +2% target mid-point and ensure that the economic expansion can be sustained.”

As investors were anticipating a decidedly “neutral” bias from the RBNZ due to recent pressure in dairy prices and lower inflation expectations, the Governor’s comments allowed the Kiwi to initially spike outright (NZD$0.7863). Nevertheless, during the obligatory press conference the Governor was able to temper the markets “bullish” sentiment by later clarifying that the bank “would be on hold for a long time.” The investors that managed to interpret the statement as a ‘tightening’ signal have since reversed those initial positions, and limited their losses (NZD$0.7782).

SNB – No hint of a signal

The percentage of the market that were looking for some telltale signs from Swiss policymakers on providing additional measures were surely disappointed by this morning’s policy announcement. Like any conservative banker, the SNB basically stuck to their anticipated script despite further substantial downward revisions to its inflation forecasts. However, the one material change to their copy was the mention that “deflation risks have increased once again” (2015 now seen at -0.1%, down from +0.2% in September). Investors should be expecting the global deflation tones to become louder amongst the major Central Banks in the New-Year.

Regarding the EUR/CHF “floor,” analysts expect it to remain the main channel for SNB to take action, however, it seems more of a defensive rather than offensive approach. Like other Central Banks, investors should be anticipating a defensive move by the SNB if inflation continues to move lower, even as early as next months meeting (€1.2015). But being on the back foot, Swiss policy makers will have to act outside the box.

Norges Kicks Kroner Hard

All NOK bears (€9.0300 – down -7.5% vs. EUR year-to-date) got an early Xmas gift from the Norges Bank this morning. Their gift, a surprise interest rate cut to +1.25% from +1.5%. Policy makers now expect to keep rates “at” or “somewhat lower” until the end of 2016. They believe it’s a necessary move on the back of slowing domestic growth and plummeting crude oil prices ($64.20). Their actions have allowed the NOK to slump to a new five-year low. The Norwegian economy has been very much isolated from the Eurozone’s woes, with an economy supported by the petroleum industry. However, falling crude prices are obviously raising questions about the outlook for the Nordic nation and Central Bankers do not like what they see.

Russian Hikes 100bp to stop slide

It’s no real surprise to see the CBR raise interest rates by one percentage point (+10.5%). The question is whether it will work as Russian policy makers try to rein in inflation and halt a prolonged slide in the RUB (new record lows $55.20). The currency has fallen -40% outright this year and the rate hike is lower than many analysts had been anticipating. This would suggest that new record lows could be on the horizon, supported by lower crude prices and EU/US sanctions. Thrown in some end-of-year USD debt repayments and the investor have more support for this trend.

ECB’s TLTRO leaves door open for QE

This morning’s ECB’s loan allotment results (€129.8b in four-year loans) is considered somewhat small and probably raises the odds that the ECB will pull the trigger on QE in Q1. The weaker demand suggests that the stronger financial institutions do not need “cheap or free” money. Draghi and company will now be pressured to purchases other asset, including sovereign bonds, if they want to raise their balance sheet by €1-trillion.

This morning’s result is not a barrier to QE, nor is it a large enough miss to support a larger negative EUR move (€1.2453) just yet. With year-end timing an issue, do not be surprised to see speculators wanting to pick up EUR’s on dips as a chance to cover or protect some of their profits. Even year-end squaring (USD selling) should be capable of providing the EUR some support.