SNB "Floor" is Breached

Forex News and Events:

We are clearly in a holiday trading mode, with the last stop being tomorrows NFP. We suspect FX will be range bound as trade wait. Yesterday in the US, the ADP survey indicated that private sector payroll employment increased by 209k vs. 206k exp. in March. This number is consistent without the recent improvements in the labor market and suggests a NFP read above 200k. On the other hand, the ISM non manufacturing index came in below forecasts at 56.0 vs. 57.3 exp. The slight downtick shouldn't be of real concern since the drop only revised abnormally large increases in the past few months. Still supporting the good Friday NFP was the underlying employment index, which rose to 56.7 from 55.7.
While the USD continues to benefit from relative growth expectations, we suspect that the current wave of demand should begin to wane, since in the end, neither the economic data nor the FOMC really provided us with anything new. The FOMC minutes stated that “a couple of members indicated that the initiation of additional stimulus could become necessary”, but even then only if “the economy lost momentum or if inflation seemed likely to remain below it's mandate-consistent rate of 2%.” This sounds slightly less dovish but in the end, incoming data will be the sole determinate, and that puts us exactly where we were prior. At the ECB meeting, there was a clear focus on the growing threat of inflation and noticeable lack of commitment to further policy support for the European crisis. When directly questioned, Draghi denied that he had hardened his stance on inflation but there was a shift in opening statement language. There were clear pledges to “monitor developments carefully” and to tackle upside risks to price stability in a “firm and timely manner.” Given this energized focus, the prospects for rate cuts look unlikely. As to further unconventional support, he sounded like that option was also unlikely.
He emphasized the role of the 3yr LTRO in helping funding conditions and lowering borrowing costs. He went out of his way to highlight that the banks primary purpose has done it's job by supporting the banks and stated that “it is up to national policymakers to foster domestic developments which support the competitiveness of their economies”. And in regards to Eurozone growth, the ECB retained the view that the risks to the growth outlook were skewed to the downside. Swiss CPI released this morning showed a jump to 0.6% vs. 0.3% m/m prior (-1.0 vs. -0.9% y/y). This small move is important since pulled from the SNB's own quarterly report on the inflation forecast, we are heading towards a bottom, then a gentle upwards slope. In delayed reaction, EURCHF pushed right pass the SNB EURCHF 1.2000 “floor” and is currently hovering right above. The low recorded to EBS was 1.1990. The lack of headlines suggests the price move was flow related. However, we think that the uptick in inflation today might have been the catalyst for a lower expectation of a higher repeg. It will be very interesting to see how the SNB reacts. Given their past statements on “unlimited fund” and credibility issues we suspect that the days of just verbal intervention are over. One important aspect of this trade is the outstanding long positions that has been allowed to build up, based on the SNB perceived protection. The question that will concern the SNB will be what if these longs start cutting (especially considering the leveraged aspect of today FX trades)? As deflation concerns begin to wane, there will be increasing pressure for an exit strategy from the EURCHF “floor”, along with other unconventional policy strategies. In addition, Federal Council is expected to announce a decision on the SNB board appointments at their weekly meeting next week. The odds on favorite Jordon but the 3rd member is less certain. But the key takeaway is the uncertainly that this new board represents. Given the current European situation it seems unlikely that the SNB would risk a higher “floor” while questions linger about commitment to current policy. There is increasing evidence of international and internal pressure to limit continued intervention. The SNB took a huge risk, which has paid off so far, in their strategy but the SNB's balance sheet is slowly expanding, increasing the risk that the 1.2000 floor might come with a heavy price.

As for today's UK BoE MPC meeting, we suspect that there will be adjustments to the central bank's current policy (either bank rate or asset purchase decision). The bank is still only halfway into its £50bn worth of asset purchases and it would be uncharacteristic for the bank to make a determination prior to its completion. Other important events will be the French auction following the poor Spanish auction results yesterday. Ahead of payrolls, US will release initial jobless claims data, then to round out the day Fed non-voter Bullard.


Today's Key Issues (time in GMT):

2012-04-05T09:30:00 GBP Industrial output Prior -0.4 M/M -3.8 Y/Y Exp 0.3 M/M -2.2 Y/Y
2012-04-05T09:30:00 GBP Manufacturing Production Prior 0.1 M/M 0.3 Y/Y Exp 0.2 M/M 0.2 Y/Y
2012-04-05T11:00:00 EUR German Industrial Production Prior 1.6 M/M 1.8 Y/Y Exp 0.3 M/M -0.2 Y/Y
2012-04-05T12:00:00 GBP MPC Monetary policy Decision Prior 0.5 Exp 0.5
2012-04-05T12:00:00 GBP MPC Asset purchase Decision Prior 325 Exp 325
2012-04-05T13:30:00 USD Initial Claims Prior 359K Exp 355K
2012-04-05T14:10:00 USD Fed Bullard
2012-04-05T15:00:00 CAD IVEY PMI Prior 66.5 Exp 67.3

The Risk Today:

EURUSD EURUSD has been under steady selling pressure this week, and that downward force is now threatening to break support at 1.3100 levels. While the short term outlook remains bearish, there is a lack of clarity in other durations prompting us to take a neutral stance. First support from here is eyed at 1.3100/10 (resistance turned support & 15th Mar high), 1.3005 (15th Mar low), then key trigger at 1.2976 (25th Jan low) will come into play. With a light data calendar today there is the possibility that this current minor recovery correction continues unabated, although tomorrow is a different story. Next resistance levels are seen at 1.3191 (support turned resistance), then not much supply till 1.3244 (21d MA), key level 1.3385 (27th Mar high) and 1.3487 (29th Feb high).

GBPUSD GBPUSD slumped to lows of 1.5835 earlier this morning, pushing further below the uptrend channel that had been providing guidance. Once again, the bulls are now trying to push the price back up but demand remains thin ahead of NFPs and downside remains tempting. On the downside, support is eyed at 1.5835/43 (28th Mar & intraday low), 1.5771 (22nd Mar low), 1.5754 (16th Mar breakout lvl), 1.5697 (13th Mar high), 1.5635 (15th Mar base support), 1.5603 (13th Mar low), 1.5516 (6th Jan high & 23rd Jan reaction low). If this rally can gather bids in the coming sessions watch for first resistance to kick in at 1.5919 (21st Mar high), 1.6001(27th Mar high) then our prior extension target at 1.6093.

USDJPY USDJPY has carved out a symmetrical triangle bottom on the hourly chart– a continuation pattern which suggests the bears have taken control and if triggered further loses may be coming. Below us, support is located at 81.57 (2nd April low), 81.40 (1st Mar high & pattern target), 80.60 (7th Mar low), and 80.25 (4th Aug ‘11 reaction high). If the current bearish correction is not sustained, area above is notably clear of supply regions given the aggressive move last week. It’s worth noting next resistance at 82.99 (3rd April high), trigger resistance at 83.40 (27th Mar high), 84.18 (15th Mar high & extension target), 84.51 (15th Dec ‘10 high), then 85.50 (Fibo lvl from 101.00 to 75.60).

USDCHF USDCHF hit a high of 0.9183 yesterday, but the pair has not managed to hold onto all of those gains today, instead retracing to 0.9143 levels. That said, broad based USD buying has insured the positive momentum has continued into today’s session. Further gains are likely but keep your eyes on EURCHF. Further rallies are likely to meet sellers back up through 0.9180 (22nd Mar & 4th April high), 0.9218 (12th Mar high), then 0.9335 (15th Mar high) In the meantime, first support on the downside is located at 0.9095 (3rd April rally correction low), 0.9006/9 (27th Feb high), 0.8955 (11th Nov ‘11 pivot), then stubborn barrier support at 0.8931 (24th & 29th Feb low).

Resistance and Support:

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