FX Focus Remains on CHF

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Top Stories

  • CHF Vericalizes off SNB peg speculation
  • Germans consider Eubonds
  • Nikkei up 1.37% Europe up 0.90%
  • Oil at $85.81/bbl
  • Gold at $1743/oz.

Overnight Eco

  • JPY Nominal Gross Domestic Product (QoQ) (2Q P) -0.3% vs. 0.6%
  • JPY Gross Domestic Product Annualized (2Q P) -2.2% vs. -1.7%
  • CHF Producer & Import Prices (MoM) (JUL) -0.7% vs. -0.5%

Event Risk on Tap

  • USD Empire Manufacturing (AUG) expected at 1.5
  • USD Net Long-term TIC Flows

Price Action

  • USD/JPY ralies to 80.00
  • AUD/USD risk flows take it 1.0440
  • GBP/USD trades either side of 1.6300
  • EUR/USD hugs 1.4300

Swiss franc was once again the center of attention as currencies opened for a new week of trade with unit posting fresh two week lows against the dollar and the euro on speculation that the SNB will consider a peg against the euro. The massive short squeeze that occurred during Asian trade was fueled by report from Swiss newspaper SonntagsZeitung that the Swiss government and the central bank are in "intense" talks about a possible franc target to stem currency gains. The massive short squeeze sent EUR/CHF to a high of 1.1455 just before the start of European dealing - a more than 1300 point rise since the pair tumbled to a low of 1.0070 on August 9th.

The Swiss authorities have struggled to restrain the rise in the franc as the unit appreciated against the dollar and the euro due to credit concerns on both sides of the Atlantic. Having given up on the idea of direct FX intervention - a policy that cost the central bank more 30 Billion CHF in losses last year, Swiss monetary policy makers have now resorted to the possibility of a peg with the reported equilibrium value of 1.100. Such a move by advanced industrialized economy against its major trading partner is exceedingly rare and the question remain whether the SNB will be able to succeed should it put this plan in to action.

However, as many analysts have pointed out, simply the prospect of a peg has had an enormously powerful impact on the market as late short have scurried for cover in one of the most volatile trading episodes in currency market history. Over the past week the daily price range in the CHF pairs has sometimes exceeded 400% of the average true range for the past year in testament to the massive swings in investor sentiment towards the pair.

Up to now the mere threat of a peg has pushed EUR/CHF towards the 1.1500 figure - a level that the SNB considers to be the minimal acceptable rate of exchange. Up to now the franc's massive rise against both the euro and the dollar has not has not had any material negative impact on the Swiss economy which continues to expand with an unemployment rate of less than 4%. However, Swiss monetary officials fear that a prolonged period of franc strength could unleash deflation and hurt the country's critical export sector. Today's decline in CHF PPI figures which printed at -0.7% versus -.0.5% eyed are a further confirmation that franc's unprecedented rise is starting to have usher in deflationary forces into the economy.

Ultimately, however the fate of the franc will be determined in Brussels rather than Zurich. The move in the franc was primarily a function of anti-euro flows and any further credit disturbance in the EZ will likely trigger more in EUR/CHF as markets flock to the safety of the franc irrespective of SNB attempts to peg it. Therefore tonight's announcement that Germany may be open to the idea o f Eurobonds could in the end prove more important to long term value of EUR/CHF than any short term policy actions by the SNB. In the meantime if risk flows remain supportive in North American trade the longs will try to squeeze USD/CHF to .8000 and EUR/CHF to 1.150 as the day progresses

FX Upcoming

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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