Currency Update: Euro, Yen, Swiss Franc

Marc Chandler submits:There have been a number of positive developments in recent days that have broken the sharp downside momentum of the euro. The unlimited liquidity that the ECB promised to provide over the next three months is helping to ease some of the tensions in the money markets.Moody’s has opined that European banks can cope with the losses related to their holdings of peripheral euro zone bonds. The ECB revised up this year’s GDP forecast from 0.8% to 1.0%.

Marc Chandler submits:Three important developments to note:1. In our discussion with clients and policy makers over the past 3-6 months we argued that one of the potential surprises that few were prepared for was a stronger dollar. The Deputy Governor of the PBOC was quoted from Davos making a similar assessment. "To me, the big risk this year is the dollar carry trades. It is a massive issue.

  Over the past week, sterling, bolstered by news of a 0.3% expansion in Q1 and reduced chances of fresh BOE action before Carney takes the reins in July, was the best performing major currency.  A short squeeze in the yen helped it almost match sterling's 1.6% gain against the dollar.

  Last week the euro was the weakest of the major currencies and the recently beaten up sterling and yen were the strongest.   A similar pattern was also evident in the dollar-bloc. The New Zealand dollar had been the strongest and last week had was the weakest, with the Canadian dollar faring somewhat better.  The Australian dollar has been trending lower, but staged a potentially important reversal before the weekend.  

  There have been some large moves in the foreign exchange market in recent days.  The euro posted its largest rally in four months last week.  The yen has fallen to its lowest level against the dollar since June 2010 and extended the declining streak to nine consecutive weeks, something not seen since 1989.  The Canadian and Australian dollar rose to multi-moth highs, as did the Mexican peso.    

It is difficult to talk about the US dollar's performance over the past couple of weeks.  There has been a key divergence.  The dollar has been trading higher against most currencies except the euro and those currencies, like the Swiss franc or the Scandis, that move in the euro's orbit.  Sterling is the exception in that it is in the euro's orbit, but has broken down.    

  It is difficult to talk about the US dollar's performance over the past couple of weeks.  There has been a key divergence.  The dollar has been trading higher against most currencies except the euro and those currencies, like the Swiss franc or the Scandis, that move in the euro's orbit.  Sterling is the exception in that it is in the euro's orbit, but has broken down.    

Marc Chandler submits:The Swiss National Bank today revised higher growth and inflation forecasts indicating, implicitly and explicitly, that deflationary pressures were abating. Those deflationary forces were the justification for the quantitative easing that included large scale sales of the Swiss franc.The last major central bank to engage is extensive intervention was the BOJ in the late 2003 through early 2004 period.