In many ways the shock of the Swiss National Bank abandoning the ‘peg’ at 1.20 in EURCHF was that it took them so long to do it.
The Swiss Central Bank (SNB) spectacularly abandoned its program of selling Francs and buying Euro’s in order to ensure that the Franc remained at a lower, thus more competitive, level than the markets buying would have pushed it to.
In doing this, without a warning to the market, without telling the IMF or local business, the SNB is signalling it can’t stand alone against the forces of European QE and Euro selling.
This action spreads risk to the RBA and the Aussie dollar as well as leading to an, “escalation in rate setting tension between the ECB, SNB, Norges bank and Riksbank,” (after the SNB cut rates to -0.75%) Chris Weston from IG Markets told Business Insider.
While Weston said that the Aussie “initially fell as risk came out of the markets” it quickly rebounded. He believes there are two pillars to this:
- From a perspective of credibility the RBA still has that; and
- This now opens up an interest rate war and this is key as Australia still commands a sizeable premium over G10 currency peers
That means that contrary to most forecasts for the Aussie to head lower in the months ahead it could actually rally from the current 0.8220 level.
Westpac’s Senior FX Strategist in New York told Business Insider that he felt that the changes to the calibration of bank and traders Value At Risk (VAR) models would “drag it (the AUD/USD) higher initially.”
The mechanism for that would be that increased volatility, as measured in the VAR models, leads to increased risk on any given position.
In turn, positions need to be cut and with the overwhelming slant of traders shorting the Aussie dollar it means they need to buy to make their risk managers happy once again.
That’s a short-term dynamic but Franulovich also said that, the Aussie will drift lower again “longer term as other forces take hold such as persistent China slowing”.
Just how far or how fast the Aussie can rally is anyone’s guess but from a technical perspective if it breaks important resistance at 83 cents it could head through 84 and maybe even challenge 85 cents.
That would be a big problem for the RBA and an Australian economy in need of a lower currency. But it would almost guarantee a rate cut in one of the next two meetings.