SNB Sounds Overly Dovish
USD struggles as confidence in the greenback continued to wane, despite the slightly encouraging jobless claims. Clearly, the overarching concern of further Fed QE, being potentially announced at the next FOMC meeting, will keep the bulls in check. As the EURO & Gold are moving in similar directions, this move seem less like the classic risk appetite / aversions trade and more like a rapid exit from the USD. The EURO gained for the positive sentiment garnered from the successful Spanish bond auction in European session and the optimism was carried through into US trading. We are far from jumping on this trend, due mainly to the lingering sovereign concern (which are long term and structural in nature) that have been yet to be addressed–only eclipsed by new headlines.
In our mind, the big news of the yesterday was the SNB rate decisions which left rates unchanged at .25%. While the decision was widely expected, what came as a complete surprise was the overly dovish accompanying statement. The SNB seemed very concerned over the direction of inflation and stated that they stood ready to act. Language clearly directed at creating the illusion that the central bank was looking to intervene. Overall we suspect that the dovish nature of the forecasts and language was geared directly at weakening the CHF and doesn’t accurately represent current economic dynamics. While some will obviously close their CHF longs, we are more optimistic that incoming data combined with renewed safe haven trades, will support the CHF (in spite of the markets pushing back against expected near term rate hikes).
Treasury Secretary Geithner’s testimony before Congress on China’s fx policy, didn’t provided the fireworks we were hoping for. Geithner said China had to tolerate “significant, sustained” appreciation of the CNY. Conveniently, there was no real mention of Japans unilateral use of Forex intervention, since it completely undermines the US’ right to try and pressure the Chinese.
In the UK , the BoE job continues to get tougher with expected retail sales figures fairing far worse than anticipated. With economic data having moderated severely as of late, yet inflation figures have stayed stubbornly elevated, the central bank will be caught between a rock and a hard place. For now, the fate of the sterling will bounce between slowing growth and potential asset purchasing and high inflation and early than expected tightening.
06:00 EUR GER Aug PPI, +0.2% m/m, +3.5% y/y exp.
07:00 EUR ECB/Austria CB Nowotny speech in Vienna, later in panel discussion.
07:30 EUR ECB/Buba Weber speech at Oestrich-Winkel EBS Symposium
08:00 EUR Jul c/acct balance, nsa & sa; prior E1.0 bln surplus, E4.6 bln deficit.
08:00 EUR Jul investment flows; prior E4.0 bln deficit.
08:00 EUR ITA Jul industrial orders and sales.
12:30 USD Aug CPI, +0.2% m/m, +1.1% y/y exp; prior +0.3%, +1.2%.
12:30 USD Aug CPI – core, +0.1% m/m, +1.0% y/y exp; prior +0.1%, +0.9%.
13:55 USD Sep U.Mich sentiment index – prelim, 70.0 exp; prior 68.9.
The Risk Today: EurUsd The general USD weakness that struck the markets on Monday as not let up. The potential bullish flag pattern on the hourly chart appears to have been activated, and encouragingly, the subsequent re-test has been met with decent bids. Our long position has stalled at 1.3160 just short of our target around 1.3180. Should the momentum pick up pace, next resistance levels above are eyed at 1.3237 (10 Aug high), and 1.3333 (6 Aug high). Expect bids to emerge around 1.2930-50 (horizontal breakout level and lower edge of bullish flag), then 1.2780 if we dip down there. Key supports below there are eyed at 1.2625-44 (10 Sep & 31 Aug lows), 1.2588 (24 Aug low and range floor), and finally 1.2522 (13 Jul low).
GbpUsd GBPUSD has remained bid by bursts of USD-selling in the past 24-hours, conclusively overcoming 1.5580 (23.6% fibonacci retracement of 1.4229 –1.6000) as well as the 26 Aug high 1.5600, before coming to a halts around 1.5650. GBPUSD has remained bid by bursts of USD-selling in the past 24-hours, conclusively overcoming 1.5580 (23.6% fibonacci retracement of 1.4229 –1.6000) as well as the 26 Aug high 1.5600. We still feel that 1.5715 is going to be a stubborn resistance level to tackle on the first attempt –not only for its repeated success at capping GBPUSD back in mid-August, but also because it currently coincides with the upper edge of a steep uptrend channel that’s formed in the past week. Nevertheless, expect the pair to meet buyers on dips to 1.5580-1.5600, then again towards 1.5485-1.5510 (3-week downtrend, 1.5490 break-out level and 50-day moving average). If the plunge extends beyond there, next level is eyed at 1.5235, before major support kicks in at 1.5115-25 (50% fibonacci level and 21 Jul lows).
UsdJpy The bears are still too wary to step back into USDJPY following the BoJ intervention and with every hour that the pair stays buoyed above 85.20 we feel the risks increase that further speculative shorts start to abandon their grip on the pair. The 3-month downtrend channel is conclusively broken (the back side of that downtrend now seen at 84.90) and a bullish engulfing candlestick pattern is clearly visible on the daily chart which suggests scope for a near-term reversal. Next resistance levels are 86.50 (5 Aug high), 86.90, then 88.07. However, looking at a longer term horizon, USDJPY is likely to continue to face downward pressure like it did 6 years ago (and echoing the saga for EURCHF earlier this year) as the BoJ/MoF fights against a market that clearly prefers holding JPY to USD –they are only therefore likely to succeed in slowing the speed of USDJPY’s descent rather than altering its direction completely. On the downside, commentators are looking at 83.00 as the BoJ/MoF’s line in the sand (but expect the unexpected when it comes to central bank intervention games), below there remains weak 2-month downtrend support at 82.10, but then nothing except weak psychological supports at 82.00 and 81.00.
UsdChf The dovish SNB shifted the trading pattern in the short term but our fundamental strategists still eyes a year-end target around 0.9800. But we are prepared for some choppy trading as EURCHF finds a sustainable direction. Currently resistance levels are eyed at 1.0278 (10 Sep high) and 1.0350 while pair will be short of buyers ahead off 1.0000.
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- …and endless liquidity for all.
