SNB's Fight against the Strong Swissy

Forex News and Events:

The SNB made no material changes in the Monetary Policy Assessment statement this morning, while holding 3m LIBOR “close to zero” and keeping the toughly worded statement “SNB is maintaining its minimum exchange rate of CHF 1.20 per eur” as the first line, reinforcing the bank’s commitment to the floor. SNB officials downplayed the solid economic data and adjusted their 2014 inflation forecast slightly lower to 0.2%. As no risk of inflation is considered in the foreseeable future, the current policy is said to be “justified”, according to Swiss policy makers. We see a slight disconnect between the economic robustness of Switzerland (even the extreme frothiness of the real-estate markets) and the central bank’s forecast.

Swiss CPI and House Prices

The status quo was widely expected given the determination of SNB to keep the policy loose to release the upside pressures in CHF. While the CPI y/y has lately spiked above 0.00% for the first time since September 2011, the inflationary pressures are well below the historical standards. However in our view, the hiking rise in housing prices is not considered seriously enough. Indeed, the UBS’ real estate bubble index stands at the highest levels since 1990/91 bubble. Well aware of the housing market prices, SNB’s macro-prudential efforts are seemingly giving weak results. The Swiss household credit mortgages steadily advances to all-time highs (CHF 647bn as of Sep 30th data) fueled by cheap mortgages. Indeed, the mortgages to private households are up by 25% and house prices by 27% since 2008. The SNB’s quarterly report highlights mixed studies on the sensitive subject. According to Fahrlänger partners, the single-family home prices persisted at the same levels as the previous quarter, IAZI announced slight rise. The Wüest & Partner however showed continuing strong upside. All in all, the situation remains uncomfortable and we believe that pressures on higher rates will intensify walking into 2014’s first half.

Jordan’s fight against the strong franc

Now, it is understandable that SNB stands strongly behind its EURCHF cap at 1.20 to dissipate the Euro-area risk. With full credibility vowing unlimited foreign currency purchases to defend the EURCHF cap, the SNB cited that Euro-zone’s risk of deflation, the weak economic recovery and the unresolved debt crisis weighs heavy on the safe-haven franc – threatening country’s exports with its largest trading partner. Dovish policy already priced-in, CHF marginally eased against EUR and USD today.

Concretely, USDCHF advanced to 0.8886 post-SNB. Despite the trend and momentum indicators pointing strongly the downside, the policy announcement should release the downside pressures on USDCHF given the oversold conditions (RSI at 31% & and the weekly levels mainly below the lower BB at 0.8879 today). Large option barriers pre-0.9000 to expire tomorrow should however continue keeping the upside limited. On a similar pattern, EURCHF rebounded to 1.22432 after failure to clear support below 1.2200. Option bids are seen at 1.2225/35 zone, calling for some upside correction. Yet, the selling interest is seen at 1.2300/20. Technically, the downside pressures should stay for a daily close below 1.2366 according to MACD 12, 26 day analysis.

While the cheap funding rates in Swiss franc have been thought to be attractive in carry trades’ funding leg (although not a profitable one at the end of the day), the hawkish speculations on Fed tapering should put some more pressure on Swissy alongside with the pullback in global risk appetite.

Today's Key Issues (time in GMT):

2013-12-12T13:30:00 CAD 3Q Capacity Utilization Rate, exp. 81.0%, last 80.6%
2013-12-12T13:30:00 CAD Oct New Housing Price Index m/m, exp. 0.1%, last 0.0%
2013-12-12T13:30:00 CAD Oct New Housing Price Index y/y, exp. 1.5%, last 1.6%
2013-12-12T13:30:00 USD Nov Retail Sales Advance m/m, exp. 0.6%, last 0.4%
2013-12-12T13:30:00 USD Nov Retail Sales Ex Auto m/m, exp. 0.2%, last 0.2%
2013-12-12T13:30:00 USD Nov Retail Sales Ex Auto & Gas, exp. 0.3%, last 0.3%
2013-12-12T13:30:00 USD Dec 7th Initial Jobless Claims, exp. 320K, last 298K
2013-12-12T13:30:00 USD 30th Continuing Claims, exp. 2,757K, last 2,744K
2013-12-12T13:30:00 USD Nov Import Price Index m/m, exp. -0.7%, last -0.7%
2013-12-12T13:30:00 USD Nov Import Price Index y/y, exp. -1.7%, last -2.0%
2013-12-12T14:00:00 CAD Nov Teranet/National Bank HPI m/m, exp. -0.1%, last 0.1%
2013-12-12T14:00:00 CAD Nov Teranet/National Bank HPI y/y, exp. 3.3%, last 3.1%
2013-12-12T14:00:00 CAD Nov Teranet/National Bank HP Index, last 159.34
2013-12-12T15:00:00 USD Oct Business Inventories, exp. 0.3%, last 0.6%

The Risk Today:

EURUSD rallied to 1.3814 despite US yields ticking higher. With MACD having crossed over the zeroline we suspect any pullback due to slightly overbought conditions should be transitory (1.3560 65-DMA should support downside move) and technicals are pointing to a test of 1.3830 year high. The first region of resistance is located at 1.3830/35 then a distant 1.4248 (Oct’ 11 high). The next support can be found at 1.3620 (28th Nov top), 1.3546 (65 dma), 1.3421 (Fibo 61.8% on Jul-Oct rally), 1.3365 (100 dma), 1.3295/99 (7th Nov low), 1.3106 (6th Sept low), 1.2995 (10th July reaction high), 1.2963 (11th July low), 1.2877 (Fibonacci 50% retracement on Jul 12’ – Feb 13’ rally), then 1.2820 (20th May low).

GBPUSD continues to chop around 1.6300 and 1.6467. Trend and momentum indicators are all bullish suggesting a challenge to 1.6488. In broader terms the decisive bullish break of key resistance 1.6388 indicates an extension of strength to 1.6746 should be anticipated. Yet failed to make new highs suggest a short term pullback. Watch for next resistance to come into play at 1.6467 (2nd Dec high), 1.6488 (8th Aug 2011 high), 1.6625 (18th Aug ‘11 high), then 1.6746 (2011 high). The support levels from here are 1.6290 (old range top), 1.6270 (21- DMA), 1.6045 (downtrend top), 1.5884 (13th Sep high), 1.5759 (17th June high), 1.5708 (fibo 61.8% on Jul-Oct rally), 1.5600 (resistance turned support) then 1.5429 (28th Aug low).

USDJPY sold-off to 102.14 before buyers stepped in pushing the pair back to 102.94. Currently we USDJPY is stuck in a sideways pattern as the failure to break above current supply region has left the pair directionless. The first resistance region is located at 103.65 (16th Sep 08 & 30th Sep 08 low), then 105.00 (psychological resistance). On the downside, supports are located at 101.61/70 (Fibo Aug-Dec retracement), 99.10 (13th Nov low), 98.59 (Ichimoku cloud top), 97.50 (triangle support), 96.56 (8th Oct pivot low), 95.83 (6th June low), 93.57 (Fibonacci 61.8% on Sept 12’ – May 13’ rally), 92.56 (2th Mar low & Fibo 38.2% retracement), 90.93 (25th Feb low).

USDCHF bears have halted their onslaught at 0.8886 as the SNB monetary policy assessment provided not fireworks. With momentum indicator MACD crossing below the zeroline and USDCHF within clear downtrend, we should see an extension of weakness to 0.8763. The first levels of support remains at 0.8886 (11th Dec low) then 0.8763 (2nd Nov 11’ low) The next levels of resistance are located at 0.9123 (21 & 65- DMA) 0.9179 (100-DMA), 0.9280 (17th Sept pivot), 0.9320 (200-DMA), 0.9450 (target), 0.9481 (range top), 0.9568 (fibo 61.8% on May-June drop), 0.9598 (11th July high), 0.9626 (31st May low & 3rd June low) then 0.9672 (fibo76.4% level on May – June drop).

Resistance and Support: