CHF Strengthens Despite SNB's Comments
Swissquote Bank Ltd | Mar 01, 2016 05:46AM ET
Forex News and Events
Intervention threats fall on deaf ears
Clearly the macro risks for continued CHF strength against the EUR are building. Expectations for the ECB to push rates into more negative territory (which limits the effectiveness of the SNB’s own negative rates strategy), combined with global risk aversion (including Brexit) have sent traders back into the traditional safe-haven CHF trade.
Yesterday, EUR/CHF traded down to 1.08104 (1-month low) before unforeseen demand sent the cross higher. SNB president Thomas Jordan’s strongly worded remarks this weekend, which confirmed for the first time the possible use of reducing exemptions on the majority of domestic banks' reserves from negative deposit rates, have renewed speculation of coming intervention. The signal was a public indication that the SNB is worried about the direction of EUR/CHF. This has put trader’s experience with the SNB on high alert. While the SNB has a history of devastating proactive policy, in our view, we would need a break below 1.0700 before the SNB would risk aggressive action (a lack of change in option prices supports this).
The wait-and-see approach (supported by expanded aggressive verbal intervention) is primarily based on the limited effectiveness of the SNB primary policy tools; direct FX intervention and negative deposit rates. The most powerful tool a central bank has is its credibility and launching policy that is ineffective erodes credibility. The SNB has suffered in recent years unable to sustain weakness in the CHF.
We suspect that the SNB have conducted small FX intervention judging by this week’s sight deposits and January’s reserves data, yet the SNB’s bloated balance sheet restricts the awe-inducing influence of intervention. That said, it’s an easy tool and we suspect that less covert direct intervention will be seen before tightened exemptions.
However, should intervention fail to halt CHF appreciation and the ECB looks to cut rates further, the SNB is highly likely to tighten negative rate exemptions. Should these conditions be met, the period around the ECB meeting on March 10th and SNB scheduled March 17th policy meeting, looks prime for further SNB action.
Russian PMI declines again
For the third month in a row, the PMI data released this morning shows that the Russian economy is still suffering. The index remains below the 50 mark which indicates a contraction. The Russian economy is facing economic sanctions that hinder its competitiveness. Russian exports keeps on declining, recent February new exports orders declined to 43.5 from 45.2. Yet, against all odds, the Russian currency is now strengthening and a one dollar note is trading below 74 ruble. We think that while Russia is struggling on the international stage, its domestic economy is currently benefiting from low oil prices. For example, Russian utilities have sharply increased their demand for fuel. Normally, they are supplied by long-term contracts with fixed (and higher prices). Utilities aside, others sides of the economy are facing much deeper difficulties and very high inflation coupled with a declining GDP does not leave much room for the Russian Central Bank to act. We remain bullish on the USD/RUB.
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EUR/CHF - Bearish !!
The Risk Today
EUR/USD EUR/USD has hourly broken support at 1.0905 (03/02/2016 low). Yet, the short-term technical structure still suggests a further bearish move. Hourly resistance lies at 1.1068 (intraday high). Hourly support can be found at 1.0810 (29/01/2016 low). Expected to show continued weakness. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).
GBP/USD GBP/USD is now consolidating. Hourly support lies at 1.3836 (29/02/2016 low) and hourly resistance is given at 1.4043 (26/02/2016 high). The technical structure suggests further decline. The road is wide open to stronger support at 1.3657 (11/03/2009 low). The long-term technical pattern is negative and favours a further decline towards the key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY USD/JPY is trading mixed in the short-term and is clearly negative in the medium-term. Hourly resistance can be found at 114.00 (29/02/2016 high). Stronger resistance is given at 114.91 (16/02/2016 high). Hourly support lies at 112.16 (intraday low). We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).
USD/CHF USD/CHF is trading around 1.0000. Hourly support is given at 0.9949 (29/02/2016 low) and hourly resistance is given at 1.0040 (29/02/2016 high). Expected to see further weakening in case the psychological resistance at 1.0000 is not fully erased. In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.
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