FOMC, Scottish Vote Influence EUR Trading, CHF Relaxed

We are heading into an event-full week across the globe. The Scottish independence referendum (Sep 18^th) and New Zealand national elections (Sep 20^th) will be the key political events that keep GBP and NZD complex under pressure. Elsewhere, the focus is already on the FOMC verdict due on September 17^th. The unwind in carry strategies on hawkish Fed expectations keep the EUR-complex well bid, while the EUR/CHF approaches the 50-dma before the SNB meeting (Sep 18^th). Despite the dovish ECB worries, the SNB is widely expected to maintain status quo as the market tensions remain under control.

SNB should keep its negative-rate joker in hand

The SNB will meet on September 18^th and is expected to maintain the status quo. The ECB easing has clearly revived speculations on a potential SNB reaction, especially as the EUR/CHF dangerously approached 1.2000-floor on September 4^th, as the ECB announced it will start buying private debt via ABS and covered bonds to inject more liquidity in the Euro-zone. Since then, the tensions in the Swiss markets cooled down rapidly enough, reaffirming that the SNB’s intrinsic credibility remains well in place.

At this point, the appetite for an SNB action is quite limited and the SNB is well aware of the delicate sentiment. The SNB policy is already nearing its lower bound, with the 3-month libor target fixed at 0.00% -0.25%, the introduction of negative sight deposits will further tighten the rope around the SNB. It is obvious that the country is closely linked to ECB decisions, as the Euro-zone countries represent more than 50% of Swiss total trades and an over appreciation of the Swiss franc is harmful for Swiss trade balance. Yet we believe that the SNB will stay in the sidelines before taking a rate action as its maneuver margin is tight and the ECB has not played all of its cards yet. We can face a fresh wave of ECB stimulus in the coming months, the ECB officials do not rule out the possibility of a potential QE to make sure that the 18-nation zone will not get trapped into a deflationary spiral. The SNB should better keep its negative-rate at hand. There are talks that the SNB would first precede with FX interventions rather than taking a rate action. One thing is sure, the tone regarding the EUR/CHF floor will remain solid; the SNB will most likely hark back its commitment to keep the EUR/CHF floor at 1.2000.

Carry unwind sustains EUR

Given the negative ECB rates, EUR has been an interesting funding leg in carry strategies, yet the last week’s carry unwind on hawkish Fed speculations gave good support to EUR-complex. EUR is likely to continue getting some more support from adjustments as carry strategists will prefer to stay in the sidelines to avoid the FOMC risk before the verdict (due on September 17^th). Although the markets are decidedly aligned on the hawkish side, the risk of disappointment keeps the EUR/USD risks two-sided. Last week’s SF Fed study (claiming that investors bet for longer period of low rates than the Fed itself), did not change our mid-run policy expectations. We continue believing that the Fed will proceed with its first rate hike no sooner than 2Q, 2015. This is in line with what we read on USD OIS forward curve. Hence, the risk in the current overheating market environment is a sharp rectification in USD positions and the US yields. We believe that the Fed will keep its tone balanced at this week’s meeting and will likely not announce a significant change in its forward guidance, most likely repeating that the slack in the labor market and the wages has not come to targeted levels yet. If this scenario materializes, the USD should partially give back its recent gains. On the other hand, the Scottish referendum (Sep 18^th) adds a third dimension to this setting. In a parallel facet, traders should be aware that the fears regarding the Scots vote weighs on the GBP, and is likely to favor the USD rather than the EUR (as the potential Scottish independence may trigger discussions on the UK’s future in the European Union, and this would be clearly EUR-negative). This means that even a Fed deception may keep the EUR-bulls behind its G10 peers. In the long-run, we believe that upside corrections in EUR/USD should remain limited (we foresee lower highs) given the concrete divergence in ECB/Fed policy outlook. We keep our long-term EUR/USD bias on the downside, yet remain vigilant against short-term volatilities.

h3 The Risk Today:/h3

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