The Swiss National Bank announced today that as of May 1 the negative rate charged for sight deposits would be applicable to most institutions that were previously exempt. Many saw this as an easing move by the SNB and sold the Swiss franc in response.
The US dollar fell against the major currencies and many emerging market currencies last week. Punished by disappointing data, it threatened to breakout of ranges that have confined it. However, the third consecutive upside surprise on core CPI helped the greenback stabilize ahead of the weekend. The price action reinforces our sense that after trending for several months, the dollar has entered a consolidative phase. Trading is choppy, and positioning stretched, but the divergence of monetary policy trajectories will likely prevent sharp dollar losses.
The key issue as the market heads into the weekend is whether the US dollar is breaking out of its trading range to the downside. Has the disappointing US economic data and the somewhat better European data finally taken its toll and forcing the dollar bulls to rein their enthusiasm?
Helped by the sixth consecutive advance in oil, the Canadian dollar extended its advance out of the three month trading range. A less dovish central bank had provided the earlier fuel.
The European Central Bank remains committed to expanding the euro monetary base, as its president affirms its policy is improving European economies.
The ECB is a month into what it has signaled will be at least an eighteen-month asset purchase program. It had begun buying asset-backed securities and covered bonds earlier, but starting last month began buying sovereign and supranational bonds.
As of April 3, the ECB settled 4.89 bln euros of ABS purchases, 65.67 bln euros of covered bond purchases and 52.52 bln euros of public bonds (sovereigns and supranational bonds).
The Federal Reserve is likely to raise short-term interest rates for U.S. Treasuries, despite fears such a move could hurt equities and kick start a recession.
Federal Reserve Chairwoman Janet Yellen again reiterated the central bank’s cautionary position on interest rates, suggesting that the Fed will begin to raise rates gradually later in 2015. “With continued improvement in economic conditions, an increase in the target range for that rate may well be warranted later this year,” she said on Friday at a meeting in San Francisco.
As the stock market prepares to close later today, Yellen will deliver a speech on the new normal for monetary policy at a conference hosted by the San Francisco Federal Reserve, of which she was previously the President. The question on many lips today is whether she will be more hawkish than she was at the press conference following the FOMC meeting.
Largely the Summary of Economic Projections, the infamous dot-plot, drove the dramatic reaction to last week’s FOMC meeting, which may still not be complete. This Great Graphic shows the latest iteration.
What riveted the investors was the sharp reduction in the dots compared with December 2014 iteration. This was the essence of the market’s dovish read.
The events of the past week will continue to reverberate in the capital markets in the week ahead. The key development was the market’s ultra-dovish read of the Federal Reserve. Although the dollar recouped the lion’s share of the knee jerk losses, the debt markets have not returned to status quo ante.
Equities rallied in the United States as the Federal Reserve hinted that interest rates will not rise in the near term, and that the Fed continues to wait until the labor market is stronger.
