ECB To Stay On The Sidelines, Swiss Exports Slide
Swissquote Bank Ltd | Jul 21, 2016 06:15AM ET
Forex News and Events
Limited expectations for ECB
We have limited expectations for today’s ECB meeting and foresee no change to the policy mix. With the true extent of the Brexit effect still unclear, and the Euro on the weaker side (due to renewed expectations for a September Fed rate hike), the central bank is under no real pressure to act. Draghi will therefore most likely adopt a wait-and-see approach. We expect the meeting and press conference to contain warnings that economic downside risks have grown and that the bank remains ready to ease monetary policy further, if necessary. However, given the softness of growth data and the mounting risks to the inflation outlook, we suspect that the September meeting will announce a time extension of QE. Selling pressures on EUR/USD heading into today’s meeting suggest that less dovish Draghi comments could put the pair back to 1.1080, but further upside should be limited.
Turkey downgrade sends TRY lower
Investor concerns over the recent events in Turkey grew overnight as Turkish president Erdogan declared a state of emergency to span the three months following the failed coup. This comes fresh on the heels of news that Erdogan is conducting a mass purge of opposition within the country. Given the political and social turbulence, S&P downgraded Turkey’s unsolicited FX sovereign credit rating to BB outlook negative from BB+ outlook stable. In addition, the S&P dropped its unsolicited local currency rating to BB+ outlook negative from BBB- outlook stable. S&P stated that downgrades were based on concerns that capital inflow will reduce, impeding economic growth. The downgrade will result in exclusion of sovereign debt in select bond indexes and therefore force selling on Turkish bonds. However, it’s been noted that investors depend more on Fitch and Moody’s rating (Moody’s placed Turkey sovereign debt on negative review on July 18th). USD/TRY rallied 1.4% to 3.0973 on rolling developments with 10-year CDS widening 15bps. We remain significantly bearish on TRY due to the cyclical damaging effects President Erdogan’s actions will have on Turkey’s economic outlook. Failure of the CBT to address the magnitude of the issue by only cutting 25bp, only amplifies our conviction that USD/TRY has significant upside potential. Turkey’s outlook looks gloomy as the country’s already leveraged economy will notably suffer as investors steer clear of this unstable EM trade. In addition should the Fed become even marginally less dovish next week, investors will quickly cut high-risk EM trades. A short-term test of the 3.100 psychological resistance looks likely.
Swiss exports collapse
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Swiss export data released this morning shows a decline of 3.3 m/m for June, representing a fourth consecutive decline. This could be explained by the increasing demand for CHF ahead of the Brexit vote. The CHF is indeed far too strong to be competitive and so the SNB was consequently obliged to intervene in order to mitigate upside pressures on the currency. Yet, despite this, the swissie continues to remain largely overvalued.
Additional trade data released today includes the trade balance for June, which weakened to CHF 3.55 billion from CHF 3.79 billion on similarly decreasing imports. Indeed Swiss manufacturing production, in particular the luxury industry, has been badly hit with production levels dropping and inputs reduced. Swiss watch exports for example, printed at a worrying -16% y/y for June.
The global slowdown will undoubtedly continue to weigh heavily on the Swiss franc and further SNB action will be required. There is unfortunately no sign of economic respite on the horizon. We remain bearish on the EUR/CHF pair. Yet, the possibility of surprise intervention from the Swiss central bank should not be discounted.
Silver - Monitoring Support At 19.23.
The Risk Today
EUR/USD continues to push lower. Hourly support lies at 1.0913 (06/07/2016 low) while hourly resistance is located at 1.1186 (05/07/2016 high). Stronger resistance is given at 1.1479 (06/05/2016 high). Sharp moves do not have to be ruled out as there are still a lot of uncertainties on asset pricing in the market. Expected to show continued weakness. In the longer term, the technical structure favours a very long-term bearish bias as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD is trading in range. Uncertainties are still important on the market, we absolutely do not rule out further increasing volatility. Expected to show further weakening towards support at 1.2798 (06/07/2016 low). Resistance at 1.3534 (29/06/2016 high) looks far. The long-term technical pattern is negative and favours a further decline as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200-day moving average). Key support at 1.3503 (23/01/2009 low) has been broken and the road is wide open for further decline.
USD/JPY keeps on pushing higher. Hourly supports are located at 103.91 (13/07/2016 low) and at 100 (06/07/2016 low). Expected now to keep increasing towards resistance at 107.90 (07/06/2016 high). We favour a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF's momentum is bullish. The buying pressures seem to prevent the pair to go lower towards hourly support at 0.9764 (14/07/2016 high). Hourly resistance at 0.9894 (12/07/2016 high) has been broken. Expected to continue pushing higher. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias since last December.
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