Can SNB Hold the Line on EUR/CHF 1.2000?

Market Drivers September 18, 2014
SNB does NOT go to negative rates
EU TLTRO
Nikkei 1.13% Europe 0.72%
Oil $94/bbl
Gold $1224/oz.

Europe and Asia:
NZD GDP 0.7% vs. vs. 0.6%
CHF SNB rates stay same
GBP UK Retail Sales 0.4% vs. 0.4%
EUR EZ TLTRO

North America:
USD Weekly Jobless 8:30
USD Philly Fed 10:00

Currency markets settled a bit after yesterday's volatile post FOMC session that saw the dollar rally sharply across the board. Dollar strength continued somewhat in Asian session but profit taking kicked in during European trade with EUR/USD popping off its lows of 1.2835 to trade as high as 1.2895 while cable recovered the 1.6300 handle with most traders convinced that the Scottish independence referendum will fail in today's voting.

The most interesting news of the night came from Swiss National Bank which held rates steady and once again reaffirmed that it will support the 1.2000 floor in EUR/CHF at any cost. The market was clearly disappointed with the news as traders were anticipating an announcement on negative rates to match ECB's policy move.

Swiss monetary authorities find themselves in a real dilemma as ECB recent easing actions have pushed the euro down through the 1.3000 level and have sent the EUR/CHF cross dangerously low towards the 1.2000 level. However, the SNB is concerned about the growing bubble in the property markets and is reluctant to use interest rate tools to shape exchange rate policy.

However, as the EUR/CHF drifts ever closer to the 1.2000 level the export driven Swiss economy is clearly starting to suffer. Today's Swiss Trade Balance figures which saw the number miss at 1.39B vs. 2.56B eyed show that exporters are feeling the pressure. The SNB acknowledged as much, stating that economic fundamentals are deteriorating.

For now the SNB is relying on the threat of intervention to keep exchange rates in check. But the policy that has worked so well for the past three years may be losing some of its power. In the current economic regime where the Fed is clearly on the path towards tightening while the ECB is moving to more and more easing suggests that the downward pressure on the euro may continue and SNB vaunted intervention threat may not be enough to keep rates in line especially if the political turmoil caused by the Scottish referendum spills over into EZ putting more fracture stress on the unit.

Meanwhile in UK the polls are open for voting and some projections are that turnout could be as high as 90%. The market is fully convinced that the No vote will prevail, but such high turnout and close polling ahead of the event leaves the situation very fluid and should exit polls which will likely hit the wires by midday New York time suggest that the vote is close cable could see some vicious volatility as the day proceeds.

In North America only a smattering of economic data points, but they could be important to the direction of the dollar and USD/JPY in particular. The weekly jobless claims will be watched carefully for any signs of weakness. Last week the data jumped to 315 and if it stays at these levels it could suggest that the demand for labor is slowing which is very much going to impact Fed action going forward. Later on at 1400 GMT the market wll also get a look a Philly Fed which is expected to slip marginally.

USD/JPY has soared to a high of 108.88 in overnight trade and has essentially turned parabolic over the past several days. Such moves generally tend to have quick and vicious corrections and any data disappointment from US could trigger a selloff before the week ends.