Is it time to bet for more weakness in JPY, CHF?

Forex News and Events:

FX traders will be focused on leading economic events in coming days. Besides ECB and BoE meetings (Thu), the PM Abe’s cabinet will meet on Wednesday and the BoJ policymakers will announce decision on Thursday. Speculations on pension fund re-shuffle out of tomorrow keep JPY-crosses well-bid. In Switzerland, EUR/CHF takes a breather as unexpected slowdown in Swiss 2Q GDP growth cooled down the selling pressures towards SNB’s 1.20 floor. The SNB is committed to defend the currency floor suggesting good opportunities to enter long bets.

Hopes for more stimulus in Japan

We are heading into event-full days in Japan. Abe’s cabinet reshuffle is due on Wednesday; the BoJ policymakers announce decision on Thursday. On the menu tomorrow, Japanese government’s pension fund reform, the most questioned timing of next sales tax hike and (maybe) additional monetary stimulus to give a push to recent slowdown in Abenomics. According to many, the upshift in JPY-crosses overnight has been mostly due to speculations that the review of Japanese pension fund (due later this month) would overweight foreign assets thus should increase selling pressures on JPY. That combined to broad based USD demand lifted USD/JPY up to 104.89 (at the time of writing). On the other hand, uncertainties continue regarding the “right” timing for the next sales tax hike (from 8.0% to 10.0%). The Japanese Finance Minister Aso stands behind the fiscal consolidation thus refusing to delay the scheduled hike, while the PM Advisor Honda voices his preference to wait until wages grow substantially and the BoJ’s inflation target is met. In this respect, Honda says that BoJ may add more monetary stimulus to reach its 2.0% inflation target. The situation remains unclear. We believe that the PM Abe will likely get positioned in favor of a delay and even of additional BoJ stimulus to re-boost the yen weakness before the year end.

This said, the BoJ policymakers will meet on Thursday and are expected to maintain the status quo at this month meeting given the persisting uncertainties. The sentiment in JPY-crosses remains biased positively (further yen weakness is seen across the board), however in case of disappointment, the main risk is a quick tactical sell-off in coming days. Option bids trail above 104.00 for two days ahead, while stops are eyed below. On the upside, exporter offers join option barriers at 105.00, then 105.50 – right above the critical 105.44 resistance (6-year high hit on January 2nd, 2014).

EUR/CHF: chasing dip-buying opportunities

In a surprise print, the quickening Swiss GDP utterly faltered in 2Q as Eurozone growth deteriorated. Swiss GDP growth q/q was unchanged at 0.0% vs. expected 0.5% while y/y growth slowed to 0.6% vs. 1.6% expected and 2.0% prior read. This was the weakest read since the second quarter of 2012. The biggest nonperformance came from the production side, the whole sale sectors and the financial services (nearly 40% of GDP). The SNB “floor” on EUR/CHF has allowed Switzerland to enjoy growth at a faster pace than the Eurozone. Yet the weak franc seemingly has been unable to protect Switzerland from Europe’s recent economic downturn. It looks as if in spite of the SNB actions “when Europe sneezes Switzerland catches a cold” remains true.

With a weaker economic outlook, prospect of the SNB easing (in response to potential ECB action) and the Fed moving toward “normalizations”, USD/CHF should continue on its current bull trend to 0.9455/56 (5-6th Sep 2013 highs). On the EUR/CHF side, the broad EUR weakness weighs as the negative correlation between EUR/USD and EUR/CHF fades. The 40-day correlation is down to -20%, from -40% beginning of August. Although, EUR/CHF is good to trend lower, the SNB’s firm commitment toward the EUR/CHF’s 1.2000 minimum exchange rate keep downside opportunities limited. Given the strong SNB credibility, we now watch further sell-offs as dip-buying opportunities.

Today's Key Issues (time in GMT):

2014-09-02T13:30:00 CAD Aug RBC Canadian Manufacturing PMI, last 54.3
2014-09-02T13:45:00 USD Aug F Markit US Manufacturing PMI, exp 58, last 58
2014-09-02T14:00:00 USD Aug ISM Manufacturing, exp 57, last 57.1
2014-09-02T14:00:00 USD Aug ISM Prices Paid, exp 58.8, last 59.5
2014-09-02T14:00:00 USD Jul Construction Spending MoM, exp 1.00%, last -1.80%
2014-09-02T14:00:00 USD Sep IBD/TIPP Economic Optimism, exp 45.5, last 44.5

The Risk Today:

EURUSD is challenging its key support at 1.3105 (06/09/2013 low). Hourly resistances for a short-term bounce can be found at 1.3221 (28/08/2014 high) and 1.3297 (22/08/2014 high). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. A long-term decline towards the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) is favoured. However, in the shorter term, monitor the test of the key support at 1.3105 (06/09/2013 low) given the general oversold conditions. A key resistance lies at 1.3444 (28/07/2014 high).

GBPUSD is fading near the resistance implied by the declining trendline, suggesting persistent short-term selling pressures. Hourly supports stand at 1.6537 and 1.6501 (25/08/2014 low). Hourly resistances can now be found at 1.6644 and 1.6679. In the longer term, the break of the key support at 1.6693 (29/05/2014 low, see also the 200 day moving average) invalidates the positive outlook caused by the previous 4-year highs. However, the lack of medium-term bearish reversal pattern and the short-term oversold conditions do not call for an outright bearish view. A key support stands at 1.6460 (24/03/2014 low).

USDJPY is making new highs, opening the way for a test of the strong resistance at 105.44 (see also the 61.8% retracement and the long-term declining trendline). Hourly supports can be found at 104.22 (intraday low) and 103.50 (22/08/2014 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 favours a resumption of the underlying bullish trend. Strong resistances can be found at 105.44 (02/01/2014 high) and 110.66 (15/08/2008 high).

USDCHF remains well supported as can be seen by today's new highs. Hourly supports now stand at 0.9177 (01/09/2014 low) and 0.9126 (28/08/2014 low). From a longer term perspective, the recent technical improvements call for the end of the large corrective phase that started in July 2012. The first upside potential at 0.9207, implied by the March-May double-bottom formation, has been met. Key resistances stand at 0.9250 (07/11/2013 high) and 0.9456 (06/09/2013 high).

Resistance and Support: