Central banks slow action this week
|Forex News and Events
SNB FX intervention to continue (Yann Quelenn)
It’s no secret that the SNB is acting to protect the franc. The swissie is currently trading above CHF 1.08 against the single currency and downside pressures on the EUR/CHF persist as the central bank fights to keep the pair above the 1.07/1.08 mark.
Total and domestic sight deposits were released this morning, showing a marginal increase on the week ending July 22. However, it is likely that intervention will continue, despite winding down as markets turn their attention away from EU uncertainties, towards this Wednesday’s FOMC meeting and the likelihood of a September Fed rate hike increases towards 25%.
We don’t expect any changes to be announced at the next SNB meeting on September 15 as the central will prefer to keep their cards close to their chest and maintain an element of surprise. For now, the central bank is strongly focused on the task of defending the franc, which is proving increasingly difficult as the liabilities side of the SNB balance sheet expands significantly. We believe that a EURCHF at 1.08 is only sustainable in the short-term for the economy. Swiss exports suffered last week, declining by -3.3% for June. The trade balance is still positive as manufacturing imports also declined. However, overall, the economy is slowing down and the SNB will therefore continue to be under pressure.
Central banks slow action (Peter Rosenstreich)
Markets are trading on significantly constricted volumes as exhausted investors head for some R&R. Friday’s higher Wall Street close (new high in S&P 500) reported seasonally low trading volumes, suggesting that directional convictions remain weak. Central banks also seem to be reducing monetary policy action rhetoric. This slowdown in activity is potentially due to already stretched policy strategy and allowing time to determine the status of global economic data in the wake of Brexit. Last week’s BoE and ECB policy meetings highlighted this wait-and-see approach. Both economies are displaying early symptoms of the negative effects of Brexit, yet are currently unwilling to ease policy (weak UK Markit PMIs are consistent with recession). This week we will hear from the BoJ and FOMC. The FOMC is unlikely to rock the boat and provide guidance for a September rate hike. While the solid economic data, financial conditions and downside risk have increased market expectation for tightening, we expect members to delay committing to the move. However, a slight acknowledgement of activity improvement should give USD a firm footing.
BoJ to ease but no launch of “Helicopter Money”
The BoJ meeting should provide the most trading opportunities. Speculation over “helicopter” money has increased with the Bernanke/Abe meeting and strong elections results. However, Governor Kuroda seems to suggest that there is “no need and no possibility” to push capital directly into the economy or consumer pockets. We remain dubious about these comments, which actually came from a mid-June BBC radio interview and as we know, the BoJ has a habit of surprise policy.
However, once you factor in low Japanese unemployment, the effect of extremely low JGB yields and the potentially illegality of BoJ underwriting public bonds, it feels that the time may in fact not be right for this extreme measure. However, given the current direction of BoJ’s inflation, additional stimulus will be needed to hit target. Policymakers are rumored to be considering stimulus measures upward of yen 20trn. While not “helicopter” money, BoJ is getting very close as a result of buying assets at a pace of yen 80trn a year). At this meeting we anticipate an increase in ETF/JREIT purchases and cut in IOER to -30bp. USDJPY should be contained between 105.64 and 107.52 with a bias for an upside move from the current price of 106.30.
| Today's Key Issues | Country/GMT |
|---|---|
| Jun PPI MoM, last 0,60% | EUR/06:00 |
| Jun PPI YoY, last -4,00% | EUR/06:00 |
| Jul IFO Business Climate, exp 107,5, last 108,7 | EUR/08:00 |
| Jul IFO Current Assessment, exp 114, last 114,5, rev 114,6 | EUR/08:00 |
| Jul IFO Expectations, exp 101,6, last 103,1 | EUR/08:00 |
| Jul CBI Trends Total Orders, exp -6, last -2 | GBP/10:00 |
| Jul CBI Trends Selling Prices, rev 14,2857 | GBP/10:00 |
| Jul CBI Business Optimism, exp -15, last -5 | GBP/10:00 |
| 22.juil. Bloomberg Nanos Confidence, last 57,3 | CAD/14:00 |
| Jul Dallas Fed Manf. Activity, exp -10, last -18,3 | USD/14:30 |
| Democratic National Convention Opens in Philadelphia | USD/22:00 |
The Risk Today
Peter Rosenstreich
EUR/USD is pushing lower, below 1.1000. Hourly support lies at 1.0913 (06/07/2016 low) while hourly resistance is located at 1.1186 (05/07/2016 high). Stronger resistance is given at 1.1428 (23/06/2016 high). Sharp moves do not have to be ruled out as there are still a lot of uncertainties on asset pricing in the market. Expected to show continued weakness. In the longer term, the technical structure favours a very long-term bearish bias as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD is trading slightly higher. Yet, bullish pressures seems to fade. Expected to break lower symmetrical triangle and to target support at 1.2798 (06/07/2016 low). Hourly resistance is located at 1.3291 (22/07/2016 high). Stronger resistance at 1.3534 (29/06/2016 high) looks far. The long-term technical pattern is negative and favours a further decline as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200-day moving average). Key support at 1.3503 (23/01/2009 low) has been broken and the road is wide open for further decline.
USD/JPY has bounced on and off within short-term uptrend channel. Hourly supports are located at 105.42 (intraday low) and at 103.91 (13/07/2016 low). Resistance is located at 107.90 (07/06/2016 high). Expected to break lower short-term channel. We favour a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF's bullish momentum has faded. The buying pressures seem to prevent the pair to go lower towards hourly support at 0.9764 (14/07/2016 high). Hourly resistance is given at 0.9907 (21/07/2016 high). Expected to continue pushing higher. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias since last December.
| EURUSD | GBPUSD | USDCHF | USDJPY |
|---|---|---|---|
| 1.1479 | 1.5018 | 1.0328 | 111.91 |
| 1.1428 | 1.3981 | 1.0093 | 109.14 |
| 1.1186 | 1.3534 | 0.9956 | 107.9 |
| 1.1031 | 1.319 | 0.987 | 105.99 |
| 1.0913 | 1.2851 | 0.9764 | 103.91 |
| 1.0822 | 1.2798 | 0.9685 | 99.02 |
| 1.0458 | 1.188 | 0.9522 | 96.57 |
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