Currencies swung wildly and dramatically yesterday. Lost in the breathless descriptions of the continued surge in the US dollar and the sudden strength in the Japanese yen is that the drama really began with renewed strength in the Swiss franc.
At around 5am Eastern, the franc suddenly surged against all currencies. In particular, it traded to fresh all-time highs against the euro (all time lows for EUR/CHF).
Source: dailyfx.com charts
The WSJ reported that the Swiss National Bank (SNB) finally decided to cease its market manipulation activities. While the SNB does not comment on such speculation, that conclusion makes sense from the trading action. It is also consistent with the SNB’s acknowledgment in March that currency intervention would have to come to an end sooner than later given potential future inflationary pressures. The SNB’s interventions have truly been futile with massive holdings of the euro quickly losing value; given the euro’s plunge yesterday, it seems the SNB ceased accumulating even more euros just in time. (Makes one wonder whether the SNB FEARS that the euro is on the verge of a tremendous collapse!)
As I indicated two weeks ago, the return of the franc buyers switches my bias to bullish on the franc, especially against the euro and the pound. (I was extremely fortunate that, before Thursday, I had already switched my positioning to short GBP/CHF and had dumped the last of my long EUR/CHF!)
While Thursday’s collapse culminated in a swift surge in yen strength, I have been wondering for days why the yen had not strengthened earlier and more vigorously. For example, as late as Wednesday, the U.S. dollar was retesting months-long highs against the yen at 95; at Thursday’s lows, this ratio dropped almost to 88. The chart below shows that the yen was stuck in a trading range against the euro for almost the entire year. This trading range only broken down yesterday.
Source: dailyfx.com charts
The Japanese government must be groaning aloud as the sudden surge in the yen re-complicates their efforts to fight stubborn deflationary pressures in the Japanese economy.
Finally, yesterday’s currency drama added further strength to the U.S. dollar index. The dollar is now approaching the heights it last saw during the financial panic in late 2008 and early 2009. Given the increasing concern about sovereign debt, an eventual retest of those highs seems very likely sooner than later.
*Chart created using TeleChart:
Be careful out there!
Full disclosure: short EUR/JPY