Two weeks on…. The CHF continues to weaken

A fortnight after the complete shock from the Swiss National Bank (SNB) decision to discontinue its minimum exchange to the Euro, and following an initial rally, the CHF has continued to weaken. The USDCHF approached 0.9250 yesterday, which represents a recovery of over 20% after the pair suffered an instant 30% decline. As unexpected as it was, the decision from the SNB has inspired a realization that the longer-term forecasts for the Euro were bearish and what had already become losses to its balance sheet were going to become liabilities that were not likely to be recoverable. The SNB was also preparing for the eventuality that safe-haven flows will return to Switzerland at some point, and this will likely be when oil-reliant nations realise how adversely impacted its economies are going to be following the no holds barred plunge in the price of oil.

As investors panicked following the sheer surprise from the SNB, increased demand for Gold was noticed as investors rushed towards safe-haven assets. This was the first time in many months that the valuation of Gold had reacted to anything other than demand for the USD and two weeks following the SNB surprise, Gold has also withdrawn a chunk of its gains. The metal fell heavily yesterday, losing close to $30 and declining to $1251. The FOMC statement released on Wednesday morning gave the impression that it is relatively upbeat on the US economic outlook and reminded investors that it still remains increasingly likely that the Federal Reserve will raise US interest rates this year. This has strongly supported USD demand while resulting in Gold profit-taking.

The FOMC statement again reiterated that it also remains unconcerned by the current situation with the oil markets, and it has come as no surprise that the price of crude has since tumbled to fresh multi-year lows at $43.57. The Federal Reserve repeating that is still not concerned with the substantial drop in oil probably provided a clue to some investors that - while reports regarding a production cut continue to resurface - the Federal Reserve will not be pushing for one. Regardless, the fundamental outlook has still not changed for the commodity and the over-powering supply and demand equation is continually tipping the scale in favour of new lows.

It was just disclosed that the European Union Foreign Ministers meeting in Brussels resulted in an extended round of economic sanctions on Russia, meaning more Ruble punishment. The USDRUB approached 69.394 with some expecting the pair to re-climb to the historic high of 80 by April. The economic outlook is so aggressively against the Russian economy that all indications point towards the elevated possibility of longer-term Ruble weakness. Although economic sanctions have just been extended, the current sanctions were already going to contribute to an inevitable recession. Not only this, but the economy is certain to face extra unexpected pressure following the plunge in the price of oil. Suspicions regarding the Central Bank of Russia intervening to strengthen the Ruble are likely to continue, but such tough economics will provide various examples why the CBR will face such a difficult task preventing Ruble weakness.

The EURUSD is still consolidating around 1.13, with the majority of investors waiting for the afternoon Eurozone inflation readings before pricing in further moves. The unexpected news regarding Germany entering deflation for the first time in five years surprisingly resulted in a muted response on the currency markets and I think this is likely because the majority of investors are trying to access the serious downside inflation risks the whole of the Eurozone are going to face this year. The inflation data is expected to come in with a negative reading later today but with the main catalyst behind the acceleration in deflation being the slump in oil prices (which have continued to plummet in price), the deflation period in Europe is likely to become even worse. Confirmation of this will just reaffirm the longer-term bearish EURUSD outlook.