Riksbank Hikes Rates, Swiss Franc Surges To All-Time Highs vs. Euro

December 16 2010 by Spencer McKay in Forex Release |No Comments

There were mixed opinions going into today’s Riksbank meeting; ultimately, the consensus forecast was correct as policymakers hiked 25bps for a second consecutive meeting, taking Swedish interest rates up to 1.25%. However, this prediction was not unanimously held; of the 21 analysts surveyed by Bloomberg, 5 believed rates would be kept unchanged – and it appears this heterogeneity has been reflected in the actual vote as well. Deputy Governors Ekholm and Svensson both pushed to keep rates on hold, and it is perhaps this cautious attitude that prevented the forecasted repo rate path being revised higher in the accompanying statement. Instead, the statement reiterated that they saw the repo rate quarterly average at 2.0% in Q4 2011, the same as it was in the last statement. EURSEK actually moved higher after the release (perhaps reflecting the disappointment that a revision to the future rate path was not forthcoming), but we feel that SEK is still one of the more attractive prospects going forward. Real interest rates remain amongst the lowest in the G10 and recent data out of Sweden has been excellent. Q3 GDP hit a 6.9% YoY (2.1% QoQ), CPI accelerated to 1.8% YoY in Nov, and just this week the AMV unemployment rate unexpectedly fell to 4.3% (from 4.5% prior). This outperformance makes a strong case for further hikes in early 2011, and therefore we feel that the SEK will remain supported.

In the remaining central bank announcement of the day, the Norges Bank is expected to keep rates unchanged at 2.00%. The talk from the central bank since the last announcement suggests that further hikes are unlikely until mid-2011, and for now, we concur that a near-term hike is improbable. One of the key arguments against further tightening in Norway is the fragility of the Eurozone recovery and what that means for Norwegian exports. Unlike Sweden, the Norwegian data since the last meeting has not been anywhere near as exceptional, so there is certainly nothing we can discern that could prompt a U-turn. Governor Gjedrem is due to be replaced in January 2011 by Oeystein Olsen, but the incumbent governor has not struck the markets as fiercely hawkish. As such, we don’t expect any movement in rates until May next year.

Aside from the scheduled events today (which include US CPI and Industrial Production), there have been interesting developments taking place in EURCHF. Earlier this morning, the pair dipped to 1.2759 – breaking below the previous all time low of 1.2766 set on 8 Sep. Our fundamental view is that the CHF still represents a golden hybrid of safe-haven asset and strong economic recovery story, so if we can get a daily close below 1.2766 then expect a lot more downside to come.

13:00 NOK Interest rate announcement, % Dec; exp: 2.00, prev: 2.00
13:30 USD CPI, % m/m (y/y) Nov; exp: 0.2 (1.1), prev: 0.2 (1.2)
13:30 USD Empire State mfg index Dec; exp: 5.00, prev: -11.14
14:15 USD Industrial production, % m/m Nov; exp: 0.3, prev: 0.0
14:15 USD Capacity utilization, % Nov; exp: 75.0, prev: 74.8

The Risk Today: EurUsd Difficult trading conditions in EURUSD, and we count ourselves among the many caught out by EURUSD’s collapse from highs of 1.3498. Regular readers may recall that we went long on the break above 1.3420 (in response to the activation of a bullish flag pattern on the hourly chart); but unfortunately, after an encouraging initial move higher, the pair stalled just ahead of 1.3500 – a long way off our 1.3660 target – and has now stopped us out at 1.3370. The sell-off finally has come to pause this morning at 1.3290, but the next levels of note on the downside are eyed at 1.3165 (9 Dec low), 1.3060 (2 Nov low), 1.2972 (30 Nov & 1 Dec low), 1.2922 (pivot from early Sep), 1.2830 (14 Sep low), and 1.2645 (10 Sep low). On the topside, first resistance is yesterday’s high 1.3498, then 1.3635 (seen on 22 Nov before the big sell-off) and 1.3785 (22 Nov high).

GbpUsd Another bullish strategy disappointingly stopped out today, as GBPUSD’s ascending triangle pattern we had been tracking on the hourly chart finally lured us into longs on the break above 1.5840, but, like EURUSD, has now been negated by a sharp sell-off to lows of 1.5712 (triggering our stop through 1.5800). Moreover, this slump has now broken out the downside of the 2-week uptrend channel, and carved out a bearish engulfing candlestick on the daily chart. We therefore focus our attention on the downside; first support is now 1.5710 (9 Dec low and 2 pips below where we paused this morning), then 1.5650 pivot, 1.5485 (30 Nov low), 1.5450 (15 Sep low), 1.5383 (200-day moving average), 1.5297 (7 Sep low) and 1.5122 (21 Jul low). On the topside, buyers are expected around 1.5815 (post-FOMC rebound high), 1.5950-5 (last seen 23 Nov), then the psychologically important 1.6000.

UsdJpy USDJPY fell all the way to lows of 82.85 yesterday, but never looked like threatening the lower end of its 82.35-84.40 range, and has now rebounded back up towards 84.00. If the pair can return to 84.40 and break higher, there is the intriguing possibility of activating an inverse head and shoulders pattern, with a target around 86.45. Resistance levels are eyed at 85.40 (24 Sep high), 85.90 (19 Aug, 30 Aug & 16-17 Sep highs) and 86.90 (2 Aug high). However, until a break-out occurs, it is far more prudent to look for range trading opportunities (i.e. selling ahead of 84.40) and looking for a return towards 82.85 (yesterday’s low) and 82.35 (7 Dec low and range floor). Should we get a break lower, next supports lie at 81.65 (12 Nov low), 80.60 (strong support from the beginning of November), 80.24 (31 Oct low), then 79.75 –the all-time low from 1995.

UsdChf USDCHF has been the one pair that has not let us down in the last 24 hours, as the activation of the bearish flag pattern has managed to proceed without the ugly whipsaw experienced in EURUSD. We are now short around 0.9650 (13 Dec low), and have watched as the pair has extended to lows of 0.9562. More encouragingly, two separate rebound rallies have been thwarted by ample selling interest ahead of 0.9650, so we now feel confident enough to move our stop down to 0.9660 – thereby ensuring our maximum possible loss on this pattern will only be around 10 pips. The theoretical target for this pattern is around 0.9455 (the length of the flag pole applied to the point of break out), but given that this level lies some 10 pips below the massively important all-time lows of 0.9464, we have chosen to be more conservative and to set our take profit order at 0.9485. The only support that stands in our way therefore will be the 0.9540 level first established on 18 Oct and re-tested on 5 Nov.

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