SNB keeps the negative-rate joker in hand as ECB's TLTROs miss estimates

Forex News and Events:

The FX markets are squeezed by busy eco-political calendar. The Fed hints at steeper rate normalization path, yet repeats that the first action will be taken “considerable time” after the end of the APP. In Switzerland, the SNB choses to keep the negative-rate joker in hand; a good decision in our view given the significantly disappointment at the first round of the ECB’s TLTROs.

Today, Scotland votes for its independence. The yes-no gap remains tight according to latest polls. The referendum results are due early tomorrow morning. The GBP-complex remains range-bound given the uncertainties. Volatilities are expected to shift higher as the first results start flowing in.

SNB prepared for immediate action

The Swiss National Bank kept its 3-month libor target unchanged at 0.00-0.25% and renewed its pledge to defend the EUR/CHF peg at 1.20, saying it is ready to buy unlimited quantities of FX if needed. The SNB focused on the deterioration of the international environment in the recent months and warned that the Swiss deflation risks are higher again. Especially given the heavy ECB stimulus and the geopolitical risks favoring the franc strength, the SNB said to be ready to take immediate action if and when necessary. Swiss franc shortly gained post-SNB.

At this point, we remain comfortable with the SNB policy. As the “floor” has not been challenged we did not expected the SNB to go on the offensive. The SNB understands that the effectiveness of policy tools might be muted when faced with a “wall of orders” or catalyst such as ECB actions or extreme geopolitical driven safe-haven flows. Therefore, the SNB will reserve action until absolutely necessary, in our view first with direct FX intervention.

We believe it a prudent decision to keep the negative-rate joker in hand, as the ECB has not played all of its cards yet. The ECB lends 82.6billion euros via the first round of TLTROs today. This amount falls seriously short of the already weak expectations (appr. 100bn). Today’s TLTRO disappointment tip off that the total lending will probably remain significantly short of the maximum 400 billion euros foreseen for the first two operations (the second will take place on December). If this is the case, the ECB may be brought to reconsider a QE. This is where we would be happy to see the SNB pulling out its negative-rate joker.

Steeper Fed normalization to begin “considerable time” after APP ends

The Fed did not disappoint the markets at its September meeting. The policy verdict has been perfectly in line with expectations: the monthly asset purchases have been reduced by additional 10 billion dollars and will be brought to end on October. The Fed fund rate will however remain at the historical low levels for a “considerable time” after the end of the QE, as reiterated Yellen in her speech yesterday. The key hawkish hint has been a steeper normalization path, yet the timing remains uncertain.

At this point, there is no mechanical interpretation of “considerable time” says Yellen. And we believe she will likely remain vigilant given the slack in the labor market. In this context, we keep our first Fed rate hike expectation unchanged at Q2, 2015.

Today's Key Issues (time in GMT):

2014-09-18T10:00:00 GBP Sep CBI Trends Total Orders, exp 9, last 11
2014-09-18T10:00:00 GBP Sep CBI Trends Selling Prices, exp -1, last -1
2014-09-18T12:30:00 CAD Jul Int'l Securities Transactions, last -1.07B
2014-09-18T12:30:00 USD Sep 13th Initial Jobless Claims, exp 305K, last 315K
2014-09-18T12:30:00 USD Sep 6th Continuing Claims, exp 2466K, last 2487K
2014-09-18T12:30:00 USD Aug Housing Starts, exp 1037K, last 1093K
2014-09-18T12:30:00 USD Aug Housing Starts MoM, exp -5.20%, last 15.70%
2014-09-18T12:30:00 USD Aug Building Permits, exp 1040K, last 1052K, rev 1057K
2014-09-18T12:30:00 USD Aug Building Permits MoM, exp -1.60%, last 8.10%, rev 8.60%
2014-09-18T14:00:00 USD Sep Philadelphia Fed Business Outlook, exp 23, last 28
2014-09-18T14:00:00 USD 2014 Preliminary Current Employment Benchmark Revisions
2014-09-18T16:00:00 USD 2Q Household Change in Net Worth, last $1490B

The Risk Today:

EURUSD EUR/USD has failed to break the hourly resistance at 1.2988 (05/09/2014 high). The subsequent marginal new lows confirm an underlying downtrend. A key support stands at 1.2755. In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The break of the key support at 1.3105 (06/09/2013 low) opens the way for a decline towards the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low). A key resistance lies at 1.3221 (28/08/2014 high).

GBPUSD GBP/USD has thus far failed to break the resistance at 1.6340 (05/09/2014 high). Hourly supports can be found at 1.6241 (intraday low) and 1.6162 (16/09/2014 low). Another resistance stands at 1.6497. The Scottish referendum is likely to significantly impact the medium-term trend. In the longer term, prices have collapsed after having reached 4-year highs. The break of the key support at 1.6220 confirms persistent selling pressures and opens the way for further decline towards the strong support at 1.5855 (12/11/2013 low). A key resistance now stands at 1.6644.

USDJPY USD/JPY has confirmed its underlying uptrend by making new highs. The short-term technical structure is positive as long as the support at 107.39 (12/09/2014 high) holds. Another hourly support can be found at 106.81 (16/09/2014 low). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The break to the upside out of the consolidation phase between 100.76 (04/02/2014 low) and 103.02 has resumed the underlying bullish trend. A test of the major resistance at 110.66 (15/08/2008 high) is expected. Another resistance can be found at 114.66 (27/12/2007 high).

USDCHF USD/CHF has broken the resistance at 0.9404 (61.8% retracement of 2013 decline), confirming persistent buying interest. However, monitor the test of the strong resistance at 0.9456. Hourly supports can be found at 0.9361 (intraday high) and 0.9301 (16/09/2014 low). From a longer term perspective, the technical structure calls for the end of the large corrective phase that started in July 2012. The break of the strong resistance at 0.9250 (07/11/2013 high) opens the way for a move towards the next strong resistance at 0.9456 (06/09/2013 high). Supports can be found at 0.9176 (03/09/2014 low) and 0.9104 (22/08/2014 low). A psychological resistance lies at 0.9500.

Resistance and Support: