FX Monthly Report

January 2015

EUR/USD 1M

EUR/USD 1Y

1,2200

1,4500

1,2000

1,4000
1,3500

1,1800

1,3000

1,1600

1,2500

1,1400

1,2000

1,1200

1,1500
1,1000

1,1000
01-Jan

08-Jan

15-Jan

22-Jan

29-Jan

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

MARKET ANALYSIS
Technical Analysis
The EUR intensified its drop against the USD in January, mostly from the 15th onwards. A huge dip was observed in the market, as
the currency pair fell roughly 15 figures. This represented a very good beginning of the year for currency traders. Every passive
strategy presented really interesting returns, as the dollar systematically appreciated during the period. A minor correction easily
achieved the expansion level of 161.8 of Fibonacci. At the moment, the pair appears to be consolidating after this big drop. The
monthly low abides by 1.1097, which stands for a support in the short term. An upward correction may lead to 1.1460, whereas a
return to an appreciation of the USD is likely to bring new lows, namely the parity between both currencies.

Fundamental Analysis
Hinging on rate hike expectations, the USD is expected to
strengthen against the other major currencies in 2015. The
EUR/USD hit an eleven year low to 1.1204 following Mario
Draggis announcement of a purchasing program worth 60
billion in assets per month throughout the end of 2016. In
addition, the ECB also decreased the cost of its long-term loans
to banks. The unemployment data in the U.S. came better than
expected, with an actual 265k claims against the 301k expected
by the market. Concerning Europe, unemployment data was
roughly as expected.
Despite the currency depreciation, Europe has still been suffering
from trade balance. The United States have also been in a
contrary trend of what should be the effective changes. All in all,
this should experience a change in the future.

Calendar
Feb. 2 U.S. ISM Manufacturing PMI
Feb. 4 U.S. ISM Non-Manufacturing PMI;
Feb. 5 U.S. Unemployment Claims; U.S. Trade Balance;
ECB Economic Bulletin; EU Economic Forecasts
Feb. 6 U.S. Unemployment Rate
Feb. 11 Eurogroup Meetings
Feb. 12 EU Economic Summit; U.S. Retail Sales
Feb. 18 U.S. Building Permits; U.S. PPI; FOMC Meeting
Feb. 19 ECB Monetary Policy Meeting Accounts
Feb. 20 German and French Flash Manufacturing PMI
Feb. 24 - ECB President Draghi Speaks; Fed Chair Yellen
Testifies
Feb. 27 German Prelim. CPI; U.S. Prelim. GDP q/q

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SPOTLIGHT: End of EUR/CHF Cap

EUR/CHF (31.07.2011-15.02.2015)

In September 2011, when the financial crisis in Europe was at its peak, the
demand for the Swiss franc rose. Many perceived Switzerland as a save
harbor to deposit their money. The Swiss National Bank (SNB) decided
then to prevent an appreciation of their currency and a following rise of
the price of their exports. It followed previous attempts to artificially
weaken the franc but without success. The cap finally implemented at
EUR/CHF 1.20 was supposed to prevent further overvaluation and the
threat of deflation. Since 2011 the SNB bought European government
bonds (mainly German bonds) in order to maintain the peg. It is debated
whether it was a protectionist measure after all. As prices remained flexible
and the additionally printed money to pay foreign currencies was not
withhold from the economy, it is believed by some to have been much
more a measure against deflation than a measure against rising prices of
exports (in this context currency wars are often mentioned). As intended,
Swiss exporters remained competitive. The Swiss economy outperformed Source: http://www.onvista.de/devisen/Euro-Schweizer-Frankenthe economy of the European Union and heavy deflation did not take place.
EUR-CHF
However the threat of deflation neither seems to be over at the end of
2014 and the beginning of 2015 when on the 15th of January 2015 the SNB abandoned the cap of the EUR/CHF. This announcement
was, the same way its implementation was, a shock to the market. The market reaction on that single trading day reflects the surprise
of its participants. The euro depreciated against the franc by 30%. Especially international brokers were very vulnerable to this move.
UKs Alpari went bankrupt and many others found themselves with heavy end of the day losses. Citi and Deutsche Bank were
reported a $150m loss due to the appreciation of the franc. Investment banks and traders dominating the market were expected to
have had even higher losses.
Swiss CPI Index;
Reuters reports that Axel Weber, Chairman of UBS, agrees with the SNBs
strategy to end the cap. He underlines the temporary nature of the
monetary measure and the strength of the Swiss economy. Meanwhile data
on the Swiss industry shows more concerning numbers: Only every fourth
Swiss company was hedged against a previous unlikely event of
appreciation, emphasizing their concerns in a decreased Purchasing
Managers Index (-5.4 points to 48.2). Further the end of the cap means a
Source:
hard hit on the Swiss tourism sector. The economists published a comment
st
by Simon Cox, BNY Mellon Investment Management, on the 21 of January http://www.bfs.admin.ch/bfs/portal/en/index/themen/05/02/blank
/key/basis_aktuell.html
2015, opposing the view of the temporary nature of the cap by Axel Weber.
Cox writes that because the franc was intended depreciate, foreign currencies were bought, paid with the domestic franc. After all
the SNB controls the amount of Swiss franc printed. Although it is well known that a country has limits when printing money, this
was not a real problem faced by the SNB, as they tried to encounter deflation anyways (the SNBs target inflation rate is at 2%). The
effect of inflation and loss in value of the home currency when printing bills should have therefore been welcomed by the SNB.
Another argument for the end of the cap was the expected QE program by the ECB, at this date to be announced one week later.
Further quantitative easing of the Euro meant heavy losses for the SNB, who hold very high amounts of foreign currencies. Although
balance sheet losses might be irrelevant in contrast to common central bank than to a commercial bank, the SNB belongs to 45% to
shareholders, who receive dividends, and the remaining part is divided up between cantons, receiving lately declining cash transfers.
This pressure can therefore be seen as one of the reasons for the abandonment of the cap.

For a descriptive timeline of pre-2011 EUR/CHF movements we recommend this Financial Times Article published when the franc
cap was announced in 2011. Current informative charts can be found in this recent Financial Times Article. A summary on updates
covering the SNB made by financial markets participants on the 15 th of January can be found here.

Contacts FEP Finance Club FX team

Andr Moreira

Charlotte Hoefner

andre.moreira@fepfinanceclub.org

charlotte.hoefner@fepfinanceclub.org

Joo Fernandes
joao.fernandes@fepfinanceclub.org

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