Is USD/CHF Ready For A Bounce?

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Top Stories

  • SNB increases liquidity into the system in order to stem CHF strength
  • BOE inflation report
  • Nikkei up 1.05% Europe 1.04%
  • Oil back above $80 to $82.21/bbl
  • Gold at $1758/oz.

Overnight Eco

  • AUD Westpac Consumer Confidence s.a. (MoM) (AUG) -3.5% vs. -8.3%
  • JPY Tertiary Industry Index (MoM) (JUN) 1.9% vs .1.1%
  • EUR German Consumer Price Index (YoY) (JUL F) 0.4%
  • EUR German Consumer Price Index (MoM) (JUL F) 2.4%
  • GBP Bank of England Inflation Report

Event Risk on Tap

  • USD Monthly Budget Statement (JUL) expected at -$140.0B

Price Action

  • USD/JPY remains close to 76.50
  • AUD/USD capped at 1.0350 after weak Westpac data
  • GBP/USD bounces off 1.6200 after BOE statement
  • EUR/USD remains well bid within reach of 1.4400 on EUR/CHF flows

After several tumultuous days of extraordinary volatility the currency markets consolidated in Asian and early European trade with high beat FX holding on to most of the gains in the wake of yesterday's announcement by the Fed that it will keep rates a near zero level for the next two years. The EUR/USD traded around the 1.4350 level while Aussie held firm near 1.0350 with only cable seeing continuous selling in towards 1.6240 ahead of the BOE quarterly inflation report.

With no major economic data on the docket, the only excitement was provided by the SNB which announced new liquidity measures that would expand bank deposits from 80 Billion CHF to 120 Billion CHF. The news was intended to weaken the Swiss franc which reached record highs against both the euro and dollar in yesterday's volatile trade before selling off slightly. Both USD/CHF and EUR/CHF spiked on the announcement, with the later rising more than 170 points in a matter of minutes. The gains however were very short lived as the pairs retraced the move within an hour.

The market appears to be utterly unafraid of any SNB intervention and Swiss bulls are not even put off by the prospect of negative libor rates as the unit continues to attract safe haven flows amidst concerns over the global economy. Most analysts dismissed today's action as "too little too late" and many market participants are convinced that the franc will not weaken unless Swiss authorities impose a transaction tax much like Brazil did when it wanted to stem the rally in the Real. Still with the franc so grossly overbought the unit is vulnerable to short covering squeeze in USD/CHF and EUR/CHF as the shorts in those pairs have become increasingly complacent. Today's action may have just been an early warning that a turn to the upside is long overdue.

In Australia today, the Westpac consumer sentiment survey registered the fourth monthly decline in a row on concerns over the slowing global economy. The Westpac-Melbourne Institute Index of Consumer Sentiment fell 3.5% in August, from 92.8 in July to 89.6, indicating global economic conditions are already having a negative impact. As we wrote earlier, "The news suggests that the RBA will likely have to reverse course and begin easing monetary policy as the prospect of global economic slowdown threatens to undermine Australian growth in H2 of 2011. Westpac forecasts a full 100 basis in cuts by the end of 2012 as RBA lowers rates to 3.75%."

Finally the BOE issued its quarterly assessment report today downgrading both inflation expectations and growth but the MPC remain relatively upbeat about the future projecting a small gain in Q4 of this year. The central bank did note that the risk of a EZ credit crisis poses a threat to that scenario but stated that its was impossible to quantify those risks. However, UK monetary authorities did not address the issue of wide scale riots that have plagued the nation in recent days and that are likely to inflict serious damage on consumer sentiment going forward. Therefore we believe that their forecast is too optimistic given the reality of the situation on the ground and cable has further risks to the downside especially if the rioting is not brought under control relatively soon. Still the market appeared to have given the UK monetary authorities the benefit of the doubt as the pair fell but then bounced hard off the 1.6200 level. Still we believe the pressure to the downside could accelerate and the pair could test the 1.6200 barrier again 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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