Some weeks ago discussion surfaced over a possible peg for the Swiss franc against the euro after safe haven flows created a sustained advance in the value of the few currencies outside of the euro-area.

Having dotted the i's and crossed the t's the plan apparently caught the Swiss bulls on the hop on Tuesday forcing the franc to halve its year-to-date gains of 13% versus the euro in the space of just a few moments. The move to peg the Swiss franc at a value of Sfr1.20 per euro cast an unusual veil over proceedings. It sent the dollar surging against both the yen and Swiss franc, while creating a wave of risk appetite that sparked gains for the euro, pound and other risk havens against the dollar. But widening gloom over the prospects for the global economy soon reversed appetite for the dollar and quickly delivered losses for the Aussie, pound, euro and more.

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U.S. Dollar - Right out of the gate on Monday stocks were on the decline. A 12-point loss for S&P index futures doubled in the space of two hours as concerns grew for the health of the U.S. economy. Friday's employment report has left the markets with a nasty aftertaste and a sour reminder that the limited policy tools left on the table are limited. One story running this morning claims that according to sources, President Obama is on the verge of a prolific tax cut. One would expect that sentiment would have been reversed by that news. Instead, investors are falling over themselves in a scramble to get out of the burning theater. The dollar index reached a six-week high after suffering a sharp fall as investors responded to the Swiss National Bank's move to pull the stairs from beneath its franc. The dollar index trades 0.5% better on Monday at 75.58 as pre-market stocks slide. Investors are keenly waiting for the August non-manufacturing ISM report due later today. The report covers the service sector or 90% of the economy with the index anticipated to fall towards the 50-line indicating neither expansion nor contraction. The last time the index fell into the contractionary zone was in November 2009.

Euro - The euro surged by 7% against the Swiss franc as investors either mistimed or underestimated the SNB's euro/Swiss peg at Sfr1.20000. The surge in Swiss selling initially drove the euro higher against the dollar lifting it to by more than two-whole cents to as high as $1.4283. However, as investors monitoring the performance of U.S. equity benchmarks saw deepening losses unfurl they were quick to lose appetite for the single currency. The gains were quick to turn to losses with the euro now trading at $1.4075 and creeping ever-closer to an excursion into a whole new range beneath $1.4000. Second-quarter GDP across the Eurozone of just 0.2% saw the area expand by 1.6% in the course of the last year. However, the make-up sorely disappointed with household consumption and government expenditure both falling by 0.2% in the three months ending June. Meanwhile gross fixed capital formation expanded at a 0.2% rate and down from a 1.8% pace in the first three-months of the year. German factory orders for July were equally dismal with export demand the culprit behind a 2.8% month-to-month slide.

Japanese yen - The yen is weaker after the Swiss intervention of a peg. I'm not sure that currency markets are growing concerned that the Bank of Japan will follow the same strategy. Rather it's the rising sense of risk aversion on Tuesday that seems to be the culprit. The yen was trading at ¥76.75 before the Swiss clock struck midnight. The dollar then pole-vaulted to ¥77.59 and despite a solid pullback, the dollar keeps motoring higher.

British pound - The pound reacted in similar fashion to the euro to trade one cent higher against the dollar up to $1.6200 before sliding to a session loss and to a three-week low at $1.6025. The pound had acted as a pseudo-alternative to the Swiss franc and I can only assume that the same type of long-liquidation is now dragging the unit lower as investors mull the rationale for maintaining such a position.

Aussie dollar -Attitude towards the Aussie after the Reserve Bank's decision to leave its policy settings unchanged at Tuesday's meeting. It also took flight after the SNB decision to put a floor under the Swiss unit. Sentiment was positive in light of the RBA's statement, which made reference to the conundrum of healthy mining activity coupled with diminishing growth prospects at home and abroad. The decision to maintain short rates at 4.75% for a ninth-straight month did nothing to change many investors' views that if the central bank could lift rates, it would. As with other units the Aussie slid as fears grew ahead of the official opening of Wall Street with the unit falling from a knee-jerk high at $1.0615 U.S. cents to $1.0524 as the morning wore on. The session low at $1.0493 has to be on the cards as sentiment sours further.

Canadian dollar - The Canadians also meet to discuss rates on Tuesday with markets pointing to a 78% chance that the bank's board will decide to leave rates unchanged. The second-quarter contraction revealed last week means that Canada and Japan are the only G7 nations to contract with a strong likelihood that in both cases their exchange rates are harming exporters. The Canadian unit slipped to $1.0051 U.S. cents and one wonders whether the loonie will slip below par with the greenback ahead of this week's labor market data.

Andrew Wilkinson

Senior Market Analyst       

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