EUR/USD: US Non-Farm Payrolls Are Likely To Cement December Hike

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EUR/USD: buy at 1.0750, target 1.0990, stop-loss 1.0670, risk factor *

EUR/CHF: buy at 1.0790, target 1.1040, stop-loss 1.0710, risk factor *

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EUR/USD: Today’s Non-Farm Payrolls Are Likely To Cement December Hike

(buy at 1.0750)

• The EUR recorded its biggest one-day surge in nearly seven years, as the latest round of policy easing by the European Central Bank fell well short of market expectations. A 10 bp cut in the deposit rate was accompanied by a six-month extension of the purchase program worth about EUR 350 billion, the reinvestment of principal payments and the enlargement of eligible securities to include regional debt.

• A 10 bp cut in the deposit rate was is in line with our and consensus expectations. The main “disappointment” is the size of QE2 and the lack of a step-up in the monthly pace of asset purchases. Given that the pace of monthly purchases remains at EUR 60bn, QE2 will be about EUR 350 billion, below our forecast of EUR 500 billion. It looks as if Draghi had to compromise more than expected with the most hawkish faction of the Governing Council.

• The new ECB forecasts envisage slightly stronger growth and slightly weaker inflation over the next two years, with the maximum revision amounting to +/- 0.1 percentage points per year. With the 2017 CPI forecast revised down to 1.6% from 1.7%, the ECB is still likely to see the lower bound of price stability being reached towards the end of 2017 or in early 2018. It was not easy to push for very aggressive stimulus when the staff forecasts envisaged a broadly unchanged macro outlook and price stability still being reached within a couple of years.

• At first sight, the market disappointment (strong EUR appreciation) reverses most of the improvement in financial conditions and creates downside risks to the ECB projections, especially if the market reaction were to continue in the next few days.

• The market shrugged off yesterday’s comments from Fed chair Janet Yellen. Yellen in her testimony was generally upbeat, spelling out how the economy has largely met the criteria the Fed has set for its first rate hike. Unemployment is low, growth continues at a modest pace, and Yellen said she is confident inflation will return to the Fed's target over time. Yellen noted that one reason not to delay a rate hike too much longer is to avoid the need for faster increases that could be more disruptive to the economy than the gradual rate path policymakers prefer. She said the US economy needs to add fewer than 100k jobs a month to cover new entrants to the workforce, setting an implicit floor for the jobs growth policymakers want to see.

• The November jobs report is scheduled for release at 13:30 GMT today. The market expects non-farm payrolls at 200k. Our economists expect slightly better figure – 210k. Wage growth likely slowed last month, but that would mostly be payback for October's outsized gains, which were driven by a calendar quirk.

• Today’s US non-farm payrolls will cement rate hike in December. In our opinion this could be a good opportunity to buy the EUR/USD at lower level, as we expect that the bearish trend is already over after yesterday’s EUR rally. We have placed our bid at 1.0750.

Significant technical analysis levels:

Resistance: 1.0981 (high Dec 3), 1.1000 (psychological level), 1.1073 (high Oct 30)

Support: 1.0790 (hourly low Dec 3), 1.0725 (10-day ema), 1.0523 (low Dec 3)

EUR/CHF: ECB Cut Add To Pressure On The SNB

(buy at 1.0790)

• With the latest ECB announcement to cut the deposit rate and to expand the QE program, pressure on the Swiss National Bank to deliver further easing measures continues, albeit to a lesser extent than previously. There is a risk that the SNB will react by cutting the target deposit rate deeper into negative territory by -0.25 bp to -1.00% at its meeting on December 10.

• The main reason for further expansionary monetary policy measures involves the impact a continuously overvalued currency has on the Swiss economy. The economic fallout from the franc appreciation at the beginning of the year is already observable in very subdued growth numbers. After a contraction of 0.3% in the first quarter and slow growth of 0.2% in the second quarter, the Swiss economy recently stagnated. Additionally, CPI inflation is currently at -1.4% yoy, historically low levels.

• But we do not expect another move on the rate front. In our opinion the SNB will only continue to point out that it sees the franc as still overvalued and that it is prepared to further intervene in the currency market if necessary.

• The disappointment after the SNB decision next week should strengthen the CHF. We expect the CHF to remain weak in the medium term. That is why

Significant technical analysis levels:

Resistance: 1.0940 (high Dec 3), 1.0950 (high Oct 13), 1.0955 (high Sep 29)

Support: 1.0800 (low Dec 3), 1.0790 (low Nov 18), 1.0775 (low Nov 17)