Should the SNB worry about the safe haven inflows?

Forex News and Events:

There is always need to worry about the safe haven inflows, especially when considered as a solid destination, a safe island in a world squeezed by political, geopolitical, economic and financial instabilities. Swiss economy has well suffered from the rapid appreciation of its currency since the beginning of the subprime crisis (although Switzerland is one of world’s major financial places). The Swiss National Bank put in place very strict unorthodox monetary policy – with 3-month Libor target at 0.00% -0.25% combined to direct EUR/CHF floor since 2011 – to overcome the safe-haven rush into CHF and to prevent the unsustainable appreciation of the Swiss franc. These policy measures however introduced important distortions in the Swiss economy, particularly in its mortgage and real estate market. “Imbalances in the real estate and mortgage market haven’t ceased to increase except in the last quarter when they stabilized” said the SNB’s Vice President Jean-Pierre Danthine in an interview to Agefi, “but didn’t diminish” he added. Given the tight maneuver margin, we believe that the additional easing is not on SNB’s menu for the moment.

The possibility of negative interest rates on sight deposits have been lately brought on the table as potential policy reaction to ECB’s extra stimulus package. The critical idea was to defend the EUR/CHF floor at the first place. At that time, the stress in the Swiss financial could directly been observed through interest rate futures priced above par. The post-ECB market dynamics however didn’t evolve against SNB’s currency cap. Once the panic eased, the speculations on negative deposits slowly faded. Today, the Swiss interest rate futures with September delivery trade at/and below par.

“Introducing negative rates on bank reserves at the SNB may reduce the need for intervention if safe haven inflows return” said the IMF in its External Stability Report yesterday. The statement didn’t trigger fresh panic in the Swiss financial place, as traders don’t see any danger regarding the current SNB policy, thus rule out the concretization of such alternative for the time being. The Swiss interest rate futures are priced in line with SNB’s current rates/currency cap, while the franc extends weakness versus USD and EUR. The present-day risk aversion doesn’t translate into safe haven flows towards the franc. Furthermore, given our mid-term negative EUR outlook, the EUR/CHF floor is not at immediate risk.

Technicals comforting

As mentioned previously, there is a significant negative correlation between EUR/USD and EUR/CHF. The 40-day correlation reaches -47% as of today, after having eased towards 0.0% on June 5th uncertainties (ECB’s additional stimulus package announcement day). The mounting selling pressures on EUR/USD lifted EUR/CHF near its three week highs pre-FOMC. Trend and momentum indicators are marginally positive; the sentiment should stay bullish as long as the 21-dma (1.21506) holds.

On the USD/CHF side, the direction is contingent on the global USD-appetite. The pair tests six month highs, helped by the recent USD pick-up. Technicals suggest the extension of gains towards 0.9156 (January 21th and year-to-date high). However the USD/CHF strength is subject to important event risk from today (US GPD, ADP and FOMC today, NFP on Friday). Soft US data or/and dovish FOMC should trigger a short-term bearish reversal in USD-appetite, thus capping USD/CHF upside provisionally.

Today's Key Issues (time in GMT):

2014-07-30T11:00:00 USD Jul 25th MBA Mortgage Applications, last 2.40%
2014-07-30T12:00:00 EUR GE Jul P CPI MoM, exp 0.20%, last 0.30%
2014-07-30T12:00:00 EUR GE Jul P CPI YoY, exp 0.80%, last 1.00%
2014-07-30T12:00:00 EUR Jul P CPI EU Harmonized MoM, exp 0.20%, last 0.40%
2014-07-30T12:00:00 EUR Jul P CPI EU Harmonized YoY, exp 0.80%, last 1.00%
2014-07-30T12:15:00 USD Jul ADP Employment Change, exp 230K, last 281K
2014-07-30T12:30:00 USD 2Q A GDP Annualized QoQ, exp 3.00%, last -2.90%
2014-07-30T12:30:00 USD 2Q A Personal Consumption, exp 1.90%, last 1.00%
2014-07-30T12:30:00 CAD Jun Industrial Product Price MoM, exp 0.20%, last -0.50%
2014-07-30T12:30:00 USD 2Q A GDP Price Index, exp 1.80%, last 1.30%
2014-07-30T12:30:00 CAD Jun Raw Materials Price Index MoM, exp 0.60%, last -0.40%
2014-07-30T12:30:00 USD 2Q A Core PCE QoQ, exp 1.90%, last 1.20%
2014-07-30T18:00:00 USD Fed QE3 Pace, exp $25B, last $35B
2014-07-30T18:00:00 USD Fed Pace of Treasury Pur, exp $15B, last $20B
2014-07-30T18:00:00 USD Fed Pace of MBS Purchases, exp $10B, last $15B
2014-07-30T18:00:00 USD FOMC Rate Decision, exp 0.25%, last 0.25%

The Risk Today:

EURUSD EUR/USD has broken the key support area defined by 1.3503 (see also the long-term rising trendline from the July 2012 low) and 1.3477 (03/02/2014 low), confirming an underlying downtrend. Yesterday's new lows confirm persistent selling pressures. Hourly resistances can be found at 1.3444 (28/07/2014 high) and 1.3485 (24/07/2014 high). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. Downside risks are given by 1.3379 (implied by the double-top formation) and 1.3210 (second leg lower after the rebound from 1.3503 to 1.3700). A strong support stands at 1.3296 (07/11/2013 low). A resistance lies at 1.3549 (21/07/2014 high).

GBPUSD GBP/USD made new lows yesterday. Prices are now challenging the key support area defined by 1.6953 and 1.6923 (see also the 50% retracement). Coupled with the overextended decline and the underlying uptrend, we favour a rebound in the next few days. Hourly resistances can be found at 1.7001 (see also the declining channel) and 1.7099 (21/07/2014 high). In the longer term, the break of the major resistance at 1.7043 (05/08/2009 high) calls for further strength. Resistances can be found at 1.7332 (see the 50% retracement of the 2008 decline) and 1.7447 (11/09/2008 low). A support lies at 1.6923 (18/06/2014 low).

USDJPY USD/JPY continues to improve after the break of the resistance at 101.86 (see also the declining channel). Monitor the test of the resistance area defined by 102.27 (03/07/2014 high) and 102.36. Hourly supports can now be found at 101.95 (intraday low) and 101.72 (25/07/2014 low, see also the rising trendline). A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. However, a break to the upside out of the current consolidation phase between 100.76 (04/02/2014 low) and 103.02 is needed to resume the underlying bullish trend. A major resistance stands at 110.66 (15/08/2008 high).

USDCHF USD/CHF has broken the key resistance at 0.9037 (see also the declining channel), opening the way for a move towards the key resistance at 0.9156. A first resistance lies at 0.9082 (03/02/2014 low). Hourly supports can be found at 0.9035 (28/07/2014 low) and 0.9001 (intraday low). From a longer term perspective, the bullish breakout of the key resistance at 0.8953 (04/04/2014 high) suggests the end of the large corrective phase that started in July 2012. The long-term upside potential implied by the double-bottom formation is 0.9207. Furthermore, the break of the resistance at 0.9037 calls for a second leg higher (echoing the one started on 8 May) with an upside potential at 0.9191. A strong resistance stands at 0.9156 (21/01/2014 high).

Resistance and Support: