Forex - SNB's Board Member Danthine Comments Sink EURCHF

Forex News and Events:

In the FX markets, events in Europe has stolen the spotlight. Greek PM Papandreou stated that he needs an answer regarding potential aid strategies at the 25-26th EU leader summit. And in a not so subtle shift, Germany is now openly supporting Greece turning to the IMF, as it would be unconstitutional for any EU member nation to provide financial aid. Clearly, the rift between Greece and Germany is growing and spilling out into the public forum. As we mentioned, we highly doubted the answer would come from within the EU and without a suitable resolution, it would continue to weigh on the EUR. The newly minted SNB’s Board member Jean-Pierre Danthine used his first official policy to speech to completely pull the rug from under the EURCHF. He stated that currency policy couldn’t be supported indefinitely and people must get acclimated to market defined FX-rates and higher interest rates. Immediately, the market took this as an indication that the SNB was lessening its FX interventionist policy and EURCHF maliciously traded down to 1.4400 took one breath and dove to 1.4355. Danthine later backtracked, saying the SNB stood ready to intervene on excessive CHF strength and would mountain its ultra loose expansionary policy. However, the damage was already done. With growth looking to exceed original forecasts and inflation probably staying above a SNB concerning threshold, we forecast further appreciation in the CHF. The USD continues to broadly outperform with the DXY up over 1% yesterday. The greenback got a boost first from firmer CPI data and then rumors that the Fed was going to hike the discount rate around lunchtime NY time. While the rumor proved to be incorrect, it once again highlighted the fact that the set was preparing to normalize policy (gradually but still moving towards normalization) with an anticipated hike by December (our view).

Today's Key Issues (time in GMT):

07:00 EUR GER Feb PPI, +0.1% m/m, -2.8% y/y eyed; last +0.8%, -3.4%.
07:45 EUR ECB Pres Trichet speech in Brussels
09:00 EUR ITA Jan industrial orders; last +4.7% m/m, +10.1% y/y.
09:00 EUR ITA Jan industrial sales; last +1.9% m/m, -2.5% y/y.
10:35 GBP BoE MPC Tucker speech in Brussels.
15:00 MXN Mexico: Overnight target rate, % 4.50 exp / prior

The Risk Today:

EurUsd As we feared yesterday, after a second failed attack on 1.3800 major resistance (and 50.0% fibonacci retracement of 1.2457-1.5145), EURUSD’s slump through 1.3640 confirmed a short-term double-top formation on the hourly chart, and the subsequent sell-off has seen us dip to 1.3587 lows so far. Although former intra-range support is still anticipated below at 1.3530, the target of that double top is further down at 1.3460 (measured as the distance from the neckline to the highest peak, then subtracted from the neckline), not far off the critical 1.3425 support that has been in place since May 2009. Looking at the daily chart, we can’t help but notice the parallels between this past month’s price action and the earlier consolidation in Dec-Jan –which also failed to overcome the upper bound of the downtrend channel just before a collapse of nearly 8% in the subsequent 5 weeks. The evening star candlestick pattern on the daily chart also makes for uncomfortable times for EURUSD bulls. Ultimately, the fidelity of our current uptrend will be crucial to staving off another leg lower for this pair, and coincidentally, the lower bound of that channel comes in today at 1.3530 (note this is the same level as prior intra-range support).

GbpUsd GBPUSD has come off considerably in the past day; predominantly a sell-off in sympathy with the move in EURUSD, but notably one which has negated GBPUSD’s support zone at 1.5200-20, and fuelled a move lower to 1.5130 this morning. We can however, put a slightly more positive spin on the price action in GBPUSD; as our stochastic indicator is already in deeply oversold territory (although no crossover buy-signal has been forthcoming yet), and the hammer candlesticks on the weekly chart are suggestive that bearish momentum is waning. The short-term uptrend channel is seen around 1.5060, which is the nearest support on our radar below, and the 1.5000 psychological level should also stall any further downward move. Ideally, we would like to see the pair back above 1.5200 to breathe some life back into the bullish bias; but with a sparse economic calendar ahead, it may simply wash around between 1.5100-1.5200 range until next week.

UsdJpy With the best will in the world, I am failing to see much exciting new development for USDJPY in the past week, as the price has done little more than fluctuate between 90.80 resistance and the back side of the former downtrend channel. Like watching paint dry. Today, that downtrend channel support intersects 89.50 –the well-documented pivot level that acted as resistance at the start of this month –which makes it even less likely we see a thrilling break-out to the downside capable of overcoming the attached buying interest. For now then, we look to make the most of the wider range, seeing next downside support at 90.10 (100-day moving average) before 89.50. On the topside, 90.80 is the first hurdle, before 91.10 (12 Mar highs), the 200-day moving average at 91.61, then 19 Feb highs at 92.15.

UsdChf Despite a sharp squeeze in USD shorts yesterday which saw USDCHF come within a pip of its 1.0650 resistance, subsequent hawkish SNB rhetoric sent EURCHF tumbling through major support to 1.4352, its lowest levels since October 2008, and in unison dragging USDCHF back down with it. We do however feel that the support at 1.0500 and back side of the former downtrend at 1.0460 is significant enough to neutralize our short-term bearish opportunism, and now wait for the next developments before initiating our next trading strategy. On the larger daily chart, this price action merely looks like a correction in the overall move higher (with 0.9918 and 1.0131 representing the consecutive higher lows in the uptrend), which prompts us to side with the long side in the medium term, but obviously, if a break back into the downtrend channel materializes then we would obey the signal to go short below 1.0460, aiming for a re-test of 1.0130.

Resistance and Support:

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot