Here's a round-up of key stories in the forex market from overnight:
1. SNB Talks Currency Peg, CHF Gains
The SNB is trying desperately to find a tool that will help stop the appreciation of the Swiss Franc, as that appreciation is causing a loss of competitiveness for the country's exporters and with exports making up about half of Swiss GDP its becoming a very strong burden for the economy. Today' we hear comments from the SNB that the central bank would be willing to peg the CHF to the EUR.
From Bloomberg: "The franc weakened after Swiss Central Bank Vice President Thomas Jordan said a temporary franc peg is within the range of options that policy makers could use to stem the currency's record-breaking rally.
"Any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability," Jordan said in an interview with Tages-Anzeiger today, when asked about a general currency peg. Swiss National Bank spokesman Walter Meier confirmed the remarks. The franc weakened as much as 2.5 percent.
The comments highlight the scale of the crisis engulfing the Swiss economy as policy makers seek measures to fight off investors piling into the franc, a haven in times of crisis. While President Philipp Hildebrand has signaled the central bank is unwilling to give up its sovereignty, some economists have said the franc's surge toward euro parity is adding pressure on the SNB to consider a peg for the first time since the Bretton Woods currency system was abandoned in 1973."
The news helped the USD/CHF to rally above 0.74, and the EUR/CHF clmbed to 1.0530 in early NY trading. Still the problems inherent with a peg are many, and until we see some action from the SNB, these comments may not come to much. It does however show the lengths to which SNB officials are going to try and find a solution to their currency's strength.
2. French Banks See Another Round of Selling
Not as severe as yesterday's rout of banks in Europe, but we do see French banks sold off again following yesterday's rumors of a downgrade to France's credit rating and the rumors that Society General is in trouble and may need rescuing.
From Marketwatch: "European stocks turned slightly lower Thursday as French bank shares swung sharply into the red, adding to heavy losses in the previous session. Shares in Societe Generale SA FR:GLE -4.80% dropped 7.5%, BNP Paribas FR:BNP -5.64%fell 6.1% and Credit Agricole FR:ACA -1.80% slipped 2.4%. All three dropped heavily on Wednesday, including a 15% decline for SocGen, on rumors of a possible downgrade of France and of trouble for SocGen itself. The bank strongly denied the rumors and French lenders initially rallied strongly on Thursday, before turning lower.
On the plus side, Spanish 10-year yields fell below 5% as the ECB continues buying up Spanish and Italian debt.
3. Pound Weakens Again as Traders Await Osborne
As we have been outlining here at FXTimes the problem with the Pound right now is that even as austerity measures have kept the UK credit rating out of the headlines the past 2 weeks, they have also created a very fragile recovery that could be in danger if the troubles in Europe and in global financial markets persist. We saw the BOE lowering their growth and inflation forecasts in their Quarterly Inflation Letter yesterday, which has bolstered that argument for opponents of the government. George Osborne is due to give a speech today in which he addressed economic growth and his austerity plan.
From Bloomberg: "The pound weakened against the euro and gilts fell before Chancellor of the Exchequer George Osborne addresses parliament on the economy amid market turmoil and the worst British riots in 30 years.
"The big risk to the pound is political," Mark Schofield, head of interest-rate strategy at Citigroup Inc. in London, said by telephone yesterday. "There are a lot of tensions in the government."
"The UK has a very credible austerity plan as far as markets are concerned but the problem is that if growth falls off dramatically, the government might need to back away from that plan to support the economy," said Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA in London.
BNP Paribas expects the U.K. economy to grow 1.3 percent this year and 1.6 percent in 2012 "with risks to the downside for both forecasts due to global economic uncertainties," Saywell added."
4. Australia's Labor Market Hits a Bumb in the Road in July, Rate Cut Now Expected
Australia's employment change came in weaker than expected in July, showing that the domestic economy down under is feeling the strain of global financial woes, but we are also seeing the ramifications of households and consumers which are feeling much more downbeat these days. Retail sales have been weak, and consumer confidence figures continue to deteriorate. Housing prices and stock prices have also been declining. Put that all together and we may see the RBA decide to lower rates in the near-term, which would be a negative for the AUD/USD and could see us break below parity in the weeks to come.
From Sydney Herald: "Australia's unemployment rate unexpectedly rose to 5.1 per cent as the economy shed jobs last month with employers growing more cautious about hiring full-time staff. In July, the national economy lost a net 100 jobs, the Australian Bureau of Statistics reported. Economists had expected the economy to have added 10,000 new jobs for the month, leaving the jobless rate steady at 4.9 per cent.
For the month, the economy shed 22,200 full-time staff and added almost as many part-timers - 22,100 - leaving a small net change. The 5.1 per cent jobless rate was the highest since November last year.
Before the release of today's jobs data, investors had been pricing in a 50-basis point cut by the RBA when its board next meets on September 6 to set interest rates. Such a cut is now rated as a three-in-four chance according to Credit Suisse data.
Only two weeks ago, some analysts had been tipping the RBA would soon have to lift rates to keep a lid on inflation - concerns now swamped by this month's turmoil on global financial markets."
The Aussie and Kiwi were a bit stronger overnight however as US futures rallied and we had a bounce in commodities, helping to bring some tepid move towards risk in currency markets. However, we really remain more in consolidation, as the sharp sell-off in the US yesterday is met with a bit of a bounce.
Chief Market Analyst