The Swiss National Bank gave us volatility on a historic scale last week as it rocked markets by abandoning the nearly three-year-old policy of supporting the value of the Swiss franc relative to the euro at 1.20. The Swiss franc consequently appreciated sharply across the board, distorting flows and liquidity market-wide.
While this took the market entirely by surprise, the likelihood is that the SNB's hand would have been forced in the coming months by European Central Bank quantitative easing. The Swiss National Bank would likely not have enough ammunition to maintain euro/Swiss franc at a level of its choosing in the face of the kind of euro weakness that would inevitably result from eurozone QE.
Continued volatility anticipated
Things are unlikely to settle down too much this week either. The ECB’s meeting is the highlight this week, as the market currently expects the unveiling of a quantitative easing package in a bid to stem deflationary pressures in the eurozone.
Estimates of the amount vary, but somewhere in the region of €600 billion is expected. Regardless, all roads seem to lead south for the euro in the bigger picture. If the market considers the impending stimulus package to be too small to reverse what is now a deflationary spiral, the euro must deteriorate from here.
Similarly, the ECB cannot expand its balance sheet by an astronomical amount without causing weakness in the euro. In spite of this, our view is that the market may well put in a short-term knee jerk correction in the wake of the announcement to squeeze out some of the existing euro sellers.
Can the Aussie dollar rally hold?
The general outlook for the Australian dollar this week is consolidation with limited upside. The Australian dollar price action is now looking congested, with interim support at May 2010 lows at 0.8067. We're looking towards a fading rally on approaches towards 0.8250, but buyers are thin still up above the 82 US cents mark.
A busy week in China will be the main driving force for the Aussie with a host of releases expected, all of which will be seen in the context of commodity demand. December fixed-asset investment, retail sales, industrial production and Q4 GDP all come out on Tuesday. The consensus growth target for GDP is 7.2 per cent, and anything short of this will heighten speculation of further monetary easing.
While oil has come off 50 per cent in the last 6 months, much has been made of increased supply from the US shale boom. The demand side of the equation however largely centres on China. As global GDP forecasts continue to wane, the current state of the Chinese economy becomes all the more important for both commodities, the broader outlook for global growth, and consequently the Australian dollar.
Michael Judge is Corporate Foreign Exchange Dealer at OzForex, a global supplier of online international payment services and a key provider of Forex news. OzForex Group Limited is a publicly listed entity with shares traded on the Australian Securities Exchange under the code "OFX".