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FX: Better ISM, Will SNB Intervention Work?

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It has certainly been a bumpy start to the month of September with Europe causing all of the havoc in the financial markets. The big story this morning is of course the Swiss National Bank's decision to put a floor under EUR/CHF at 1.20. The SNB wanted to show the market that they will no longer tolerate any further strength in the Franc and their intervention plus commitment to return to the market as often as necessary has sent the Franc down 8 percent against the U.S. dollar and euro. However it was not just Switzerland that caused significant volatility in the currency markets. Investors are still worried about the possibility of Moody's downgrading Italian debt. Germany reported much weaker factory orders, which raises concern that the ECB could move to a less hawkish stance on Thursday. With little on the U.S. calendar this week, Europe will be the main focus. Trichet is nearing the end of his term and he only has two more opportunities to raise rates. Given the recent deterioration in economic data, volatility in the markets, slowdown in the U.S. economy and most importantly, crisis of confidence in Europe, there is zero chance that Trichet will raise rates before he steps down at the end of October.

2 Immediate Questions -

For the time being the focus remains on Switzerland and two immediate questions come to mind with the SNB's announcement:

1) Will the SNB Intervention Work?

We have never seen a sell-off in the Franc as large as today's move. The 8 percent drop in the Swissie is a record breaking decline. The best comparison is the March 2009 SNB Intervention. At the time, EUR/CHF soared from 1.4805 to 1.5315 and stabilized above 1.50 for the next 6 months. It is estimated that the central bank spent as much as EUR4 billion on intervention. It is also estimated that the SNB has much as EUR150 billion in reserves to spend on intervention. Even though the SNB has lost as much as $36B on intervention over the past year and a half, the central bank's goal is not to make money on intervention - to breakeven is good enough. Given how aggressive and serious this latest action from the SNB is, there is reasonable chance that their decisive action will work in stabilizing the currency at least for the next few months. However it will be an uphill battle for the SNB because as long as the Eurozone continues to be mired in debt troubles, investors will still be tempted to park their money in the Swissie because return of capital is more important than return on capital in this current market environment. When the SNB intervened in 2009, it kept EUR/CHF confined within a 2.6 percent trading range for the next 6 months. As long as EUR/CHF doesn't start to ricochet higher, investors could still look at the Franc as a safer bet than the EUR.

2) Are there Any Safe Havens Left?

The reason why the SNB has sought to halt the rise in the Swiss Franc is because the Swissie and the Yen have become the world's top safe haven currencies. Today's action by the SNB significantly diminishes but does not eliminate the Franc's attractiveness as a safe haven. The Japanese Yen has its own problems with Fitch threatening to downgrade the country's sovereign debt rating. This leaves gold as the only true safe haven. With the U.S. economy poised for further weakness and the Eurozone sovereign debt crisis expected to blow up at any point, there is a still a strong need for safety. Gold is only true safe haven and as more investors start to realize this, gold prices could exceed $2000. The Swiss Franc, Japanese Yen and U.S. dollar will remain safe havens but they won't be as attractive as gold.

As mentioned earlier, the U.S. calendar is very light this week. One of the few pieces of data scheduled for release was this morning's non-manufacturing ISM report. The index rose to 53.3 vs 51 expected, which helped to drive the U.S. dollar higher. However much of the improvement can be attributed to prices paid, which is not indicative of strength in the U.S. economy. New orders remained below 50 for the second straight month while the employment index slumped to 51.6 from 52.5. The ISM number will provide a minor boost to the greenback but Friday's abysmally weak non-farm payrolls report will prevent further appreciation in USD/JPY.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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