EUR/CHF Dips Lower Amid Surge In FX Reserves
Swissquote Bank Ltd | Jun 07, 2016 07:58AM ET
Forex News and Events
Swiss Foreign Currency Reserves increase (by Arnaud Masset)
Foreign currency reserves held at the Swiss National Bank (SNB) rose substantially in May, suggesting that Thomas Jordan and his team may have continued to defend the Swiss economy against further CHF strength. FX reserves rose CHF14.2bn - or 2.40% - to an all-time high of CHF602.1bn. This is the largest increase since January this year (+CHF15.4bn) and, in our opinion, it is a clear sign that the Brexit situation is increasing the pressure on the Swiss central bank as investors fear the potential impact it may have on the EUR and the GBP against the CHF.
The huge amount of FX reserves held by the SNB (roughly 90% of Switzerland’s GDP) is raising the question of the sustainability of this position and more precisely how long the SNB could defend this position without losing its credibility. This morning, EUR/CHF plummeted after the release and moved below 1.10, down 0.35% compared to the European opening price.
For the next few months, a potential exit of the United Kingdom from the European Union remains the biggest threat to the SNB. Indeed, the problem is that it is very difficult to know what is already priced in as the potential consequences of a Brexit on the UK and EU economies remain unclear and especially to what extent it will impact growth negatively. Even in case of a Brexit, it will take long and stirring negotiations between the former spouses before we would have any guidelines on such a new relationship.
Money flows into the yen (by Yann Quelenn)
2016 has seen the current account of Japan's Balance of Payments drastically increase. April data, which is expected tonight is expected to be narrow, around yen 2’303 billion from yen 2’980 billion. Capital continues to flow into the country, increasing upside pressures on the Japanese currency. As a result, it is going to be even more difficult for the Bank of Japan to reach an inflation target of 2% within the next two years.
Also tonight, financial markets also expect an upward revision from the Q1 GDP to 0.5% q/q from 0.4% q/q. Even if there is such a slight increase, this does not structurally change the deflationist nature of the Japanese economy. Governor Kuroda will meet next week to discuss monetary policy options and it is likely that further stimulus should be added in an effort to foster inflation. The global slowdown is pushing many central banks to lower rates. The BoJ is one step ahead and is almost compelled to act or the country may face a recession. We remain bearish on the USD/JPY. The BoJ cannot do much more than what it is currently doing, so we believe that the upside potential on the pair is limited for the time being.
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EUR/GBP - Lack Of Follow-Through.
The Risk Today
Yann Quelenn
{{1|EUR/USD}} is now consolidating below 1.1400. Hourly resistance can be found at 1.1479 (06/05/2016 high) and hourly support can be found at 1.1098 (03/06/2016 low). The technical structure suggests further short-term sideways price action. 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 has surged towards resistance at 1.4654 (31/05/2016 high) before falling again. Stronger resistance is located at 1.4770 (03/05/2016 high). Expected to show renewed bullish momentum toward resistance at 1.4770 if support at 1.4300 is not monitored. The long-term technical pattern is negative and favours a further decline towards 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's selling pressures are not over despite ongoing consolidation. Hourly support at 106.25 (04/05/2016 low) has been broken while hourly resistance is given at 107.89 (intraday high). The medium term momentum is clearly oriented downwards. Expected to further weaken. 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 keeps on weakening. The parity looks far. Hourly support at 0.9751 (17/05/2016 low) has been broken and the pair is now monitoring hourly support at 0.9652 (06/05/2016 low). Expected to show a continued bearish move. 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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