Forex: Major Currencies To Hold Steady, Swiss Franc Weighed By SNB

Talking Points

• Swiss Franc: SNB To Take ‘Necessary’ Measures
• British Pound: Continues To Search For Support
• Euro: Holds Within Previous Day’s Range
• U.S. Dollar:Mixed Across The Board On Holiday Trade

The foreign exchange market was relatively quite during the European trade, and the major currencies should hold steady going into the end of the week as global investors go offline for the holiday season. The EUR/USD continued to consolidate on Friday, with the exchange rate bouncing along the 200-Day moving average at 1.3089, and the euro-dollar is likely to stay flat throughout the remainder of the day as price action holds within the previous day’s range. However, as Fitch cuts Portugal’s credit rating to A+ from AA-, the single-currency could face additional headwinds over the following week, and fears surrounding the European sovereign debt crisis are likely to bear down on the exchange rate in 2011 as policy makers struggle to restore investor confidence.

In turn, the Swiss Franc may continue to appreciate over the near-term as the low-yielding currency benefits from the flight to safety, but the short-term reversal in the EUR/CHF and the USD/CHF may gather paceas speculation for a currency intervention resurface. The Swiss National Bank pledged to “take the measures necessary to ensure price stability” as the European debt crisis hampers the outlook for growth and inflation, and went onto say that the ongoing turmoil within the financial system could “have a detrimental effect on the Swiss economy” in its quarterly report. As the risk for contagion intensifies, the SNB’s efforts to talk down the recent appreciation in the local currency may fail to bear fruit as market participants speculate Spain and Portugal to share Ireland’s ill fate, and the recent strength underlying the Swiss Franc may gather pace in the following year as market sentiment falters.

The British Pound failed to retrace the decline from earlier this week as the exchange rate fell back from a high of 1.5475 during the European trade, and the GBP/USD may continue to pare the overnight advance as it search for support. In light of the recent developments, we expect the Bank of England to maintain its wait-and-see approach throughout the beginning of 2011 as the economic outlook remains clouded with uncertainties, but the MPC may see scope to start normalizing monetary policy over the coming months as the central bank expects inflation to hold above the 2% target throughout the following year. As a result, we may see British Pound strengthen going into the following year, and members of governing committee may heed to Mr. Andrew Sentance’s call to raise the benchmark interest rate 25bp in order to meet their dual mandate to ensure price stability while fostering full-employment.

U.S. dollar price action remained mixed on Friday, with the USD/JPY falling back from a high of 83.16, while the greenback continued to lose against its Canadian counterpart as the exchange rate slipped to a fresh weekly low of 1.0051. As U.S. traders go offline in observance of the Christmas holiday, the drop in market liquidity could produce choppy price action throughout the currency market, but it seems as though most of majors will continue to hold steady going into the end of the week as they trade within a tight range.

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