FX and equity markets have been trading under conditions of extreme volatility this week and yesterday’s announcement by the Federal Reserve to keep the fed funds target rate exceptionally low through mid-2013 only compounded on this trading environment. The Fed statement had both markets fluctuating and in the last hour of trading the Dow closed up 4% and the dollar fell broadly in line with other safe haven trades.
In the accompanying rate statement the Fed downgraded its expectations for the US economy but left the door open for further quantitative easing which helped propel traders back into equities and other high yielding currencies. Given the turbulent trading environment since August 1st negative events stemming from the euro zone will likely continue weigh on the euro and lend strength to the faithfulness of the USD as a safe haven currency. However, with expectations for US rates to stay at ultra-low levels until mid-2013 and the possibility of QE3, this argues for a declining dollar in medium term.
The EUR/USD has made a couple attempts at the resistance of 1.44 and a break here will go on to test 1.4470 from the consolidation pattern that has been forming since early May. Looking a bit further down the road a breakout of the consolidation pattern suggests a rally at least to the 1.4700 area followed by the May high. Support is seen in a range between 1.4310-1.4290. Below here 1.4050 may be supportive.
The Swiss National Bank was back in the FX to weaken the Swiss franc and punish speculators from driving the CHF lower. The SNB will introduce liquidity via FX swaps with other European central banks along with increasing sight deposits in the SNB reserves in an attempt to push rates even lower. The reaction in the forex trading markets was an initial move higher in both the USD/CHF and the EUR/CHF but both pairs were quickly trading back at their pre-announcement levels. The move by the SNB comes on the heels of sharp gains for the CHF in risk averse trading from yesterday. While the move is quite large reversing the “massive overvaluation of the Swiss franc” as the SNB calls it will be a difficult task given the struggling euro and the market’s expectation for additional easing in the US.
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