CHF continues to withdrawal gains following removal of currency peg

As reality sinks in amid the market’s growing realization that the astonishing move from the Swiss National Bank (SNB) to remove the minimum exchange rate had far more to do with the ever-increasing chances of the Euro decline persisting, – and the possible eventuality of safe-haven flows returning to Switzerland as optimism in the global economy remains in the balance – the CHF has continued to withdraw some of its incredible gains against its counterparts. After rising in valuation by around 30% against the USD, the CHF has already lost over 15% of these gains with the general consensus presently being that the increased CHF value will hurt exporters and inspire potential deflation risks. As long as this continues to be the market reaction, it looks possible that the CHF will continue withdrawing gains against the USD in the longer-term.

The most likely reason behind the SNB decision to remove the currency cap against the Euro is possibly linked to the bearish forecasts for the Euro to continue its decline against the USD over the remainder of the current year. The EURUSD has already dropped by 1.39 to 1.14 over the previous 7 months, with the SNB balance sheet already encountering heavy losses that quite possibly would have never been recoverable. Others have seen the SNB decision as the clearest indication they could receive that the ECB will be introducing full-blown QE this coming Thursday, with European stocks continuing to rally as a result of this.

To be honest, the pressure on Mario Draghi to introduce QE this coming week had already increased to high levels, but now the markets have begun to price in the introduction of ECB QE into European stocks as well as the EURUSD, Draghi is under further pressure to deliver on Thursday otherwise we could be at risk to a significant rebound in the European markets. Since plummeting to a near 12-year low against the USD on Friday at 1.1460, the Euro has already rebounded back to 1.1627 on Monday and I think this is due to some hesitation from investors to actually believe that after nearly a year of anticipation, ECB QE might actually be introduced.

After declining by over 100 pips on Friday as investors sought safe-haven assets following the unexpected SNB shock, GBPUSD volatility is low today. Action in the pair should pick up later this week though, with key economic data released including UK jobless claims, the latest BoE minutes and UK retail sales for December. The major downside risk for the pair will be the BoE minutes, especially if the central banks already strong views on weak inflation further strengthen and push back UK interest rate expectations. The GBP is already suffering from a complete lack of attraction, however there is potential for this to further worsen before investors reconsider purchasing the currency.

Although the outlook for the BoE minutes on Wednesday might be dovish, sterling bulls will be hoping that retail sales released later in the week will provide something for the bulls to cheer about. UK household budgets have been eased substantially following the dramatic decline in the price of oil and optimists will be hoping this will benefit UK retailers.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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