EUROPEAN FX UPDATE: Franc flies following surprise 50 bp SNB rate rise

Analysis details (10:17)

CHF/DXY

The SNB was widely expected to hold fire pending confirmation of a 25 bp ECB hike in July, but shocked most in the market by pulling the trigger early and harder with a half point hike given further considerable and broad-based inflation increases in many countries, including Switzerland since the last meeting in March. Clearly, the pre-emptive strike was partly due to the fact that SNB policy reviews are scheduled on a quarterly basis and if a move was deemed warranted before the next in September it might be deemed somewhat irregular. Predictably, the Franc shot up across the board and sustained bullish momentum when Chief Jordan clarified that the currency is no longer seen as ‘highly valued’ after explaining that the decision to tighten is aimed at preventing inflation from spreading more broadly to goods and services. Usd/Chf reversed from the high 0.9900 area to sub-0.9800 at one stage and Eur/Chf to sub-1.0200 vs a 1.0400+ peak, with follow-through to the Dollar index that was in the process of rebounding from 104.0700 after the Fed and Chair Powell managed to engineer a soft landing for the Buck, but topped out at 105.500. To rceap, the FOMC matched consensus for a 75 bp hike and lifted rate projections via the dot plots, but Powell pushed back against the notion that ¾ point increments might now be the norm by describing the biggest rise since 1994 as uncommon, for obvious reasons.

GBP/EUR

Sterling was already looking shaky and probably on the assumption that the BoE will resist all the hawkish vibes with another gradual 25 bp hike, albeit not necessarily unanimously carried by the MPC. Cable recoiled from just under 1.2200 to circa 1.2058, while Eur/GBP retested 0.8600-plus levels from around 0.8575, as EGBs were hit much harder post-SNB than Gilts and UK STIR contracts retained the bulk of their decent gains in stark contrast to Euribor futures amidst a ratchet up in ECB hike pricing. However, the Euro was also a victim of the Greenback’s relatively firm bounce with Eur/Usd down to 1.0381 compared to a 1.0469 peak.

NZD/AUD/CAD

Another swoon in risk sentiment and worrying data undermined the Kiwi, as NZ Q1 q/q GDP unexpectedly contracted, while the Aussie could not sustain much in the way of traction via mainly upbeat labour market metrics and an acceleration in consumer inflation expectations. Elsewhere, the Loonie lamented the physical cross-over in BoC and Fed rates ahead of Canadian wholesale trade, with WTI still well off recent peaks. Nzd/Usd is hovering above 0.6250 pre-NZ’s manufacturing PMI, Aud/Usd under 0.7000 and Usd/Cad is on the 1.2900 handle.

JPY

Risk-off flows/positioning favouring the Yen rather than specifics given weak Japanese trade data overnight, headline balance and exports especially, and there may be some speculation that the BoJ may lean less dovishly tomorrow as the last major Central Bank yet to begin or even hint at policy normalisation anytime soon. Usd/Jpy probing 133.00 from 134.68 at the other end of the spectrum.

SCANDI/EM            

Aversion weighing on the Nok and Sek, but some protection for the Huf after the NBH lifted the 1 week depo rate by 50 bp and Viraj stated that tightening will continue until at least as long as inflation reaches a peak, while the Brl may be able to contain declines in wake of last night’s 50 bp BCB hike with guidance for more of the same or a smaller rise in the Selic rate next time. Conversely, technical impulses work against the Cnh and Cny, on top of softer Chinese house prices and the ongoing spread of Covid cases.

16 Jun 2022 - 10:17- Fixed IncomeData- Source: Newsquawk