EURCHF and Dollar Index to soar as we head to global QE Extreme

The chart below shows why the new SNB EURCHF floor could be of extreme importance. I am just back from yet another trip to Zürich and I found people extremely bullish on CHF – with talk of corporates wanting to sell, sell, sell etc. But franc bulls need to pause a moment to consider the following few points:

• The SNB has an ‘unlimited ability to print money’
• The SNB is worried about deflation – hence the need to monetize
• The bias is far too complacent on the direction for the CHF, with more than 95% on the bullish side

• The SNB is clearly committed and feels there is no alternative and perhaps even more importantly, they have full political backing from the government.

Source: Bloomberg LLP and Strategy and Research

 

I have two strong view for the next 12 months:

1.       A much stronger US Dollar - DXY to 100 (now 75.00)

2.       A much higher EUR vs CHF - to 1.40/1.50

The scenario for much stronger US dollar:
The view on the greenback strengthening is based on a  too low consensus on US growth, better than ‘announced’ jobs and consumer spending data. Finally, the US will become competitive inside next two years on unit labor costs. Add to that the fat tail risk of HIA 2 being introduce- and the rest of the G-20 moving toward the same kind of QE measures we have seen from the US Fed – why should only the USD be punished for QE when “everyone is doing it?” (see more below)

 

The Scenario for a much higher EUR/CHF

The SNB has no alternative, Switzerland is headed full steam into “Japanisation” without extreme measures that include a major change in the “expectation curve” when we see 1.30 plus in EURCHF. Also, investors will have to cover massive losses from selling EUR calls. Finally, inside the next 12 months we will have some kind of a “resolution” on the EU debt crisis.

 

Macro themes
There are really only three ways to deal with the current situation:

1. Accept Crisis 2.0 – deleveraging and pain, but also better for longer term restructuring – unlikely accepted by policy makers but more likely from a market perspective.
2. Accept Japanisation – deflation, slow-growth and no structural changes.
3. Go to QE Extreme/Maximum Intervention – betting that the ‘weather’ will improve by spending ever more money and making very gradual structural changes. The Keynesian economists/advisers are again getting upper hand as they now can claim (wrongly!) that the reason we did not get back on track is because we did too little, too late – similar to Japan. This is the route the G-20 will move to for now. I see all major nations in QE Extreme/Maximum Intervention mode by the halfway point of 2012.

 

By the way, more specifically on the current EuroZone crisis: Greece going bankrupt is not a fat fat-tail event (Black Swan), it’s the most expected outcome ever!

 

If Greece leaves the EU,  it will lead to a major “risk on” scenario as Europe will have regained the initiative, so if the Euro-zone’s next development is a break-up from the weak (Greece) then it’s good for risk – if it’s a break-out from the strong (Finland or Germany) it’s Crisis 2.0 extreme. Chances? 50/50

 

That’s it for now – I’m off to Spain and the Vuelta and some fact-finding,

 

Have a nice week-end

 

Steen

Swiss Franc Declines on News of Target Rate

The Swiss franc plunged after the Swiss National Bank said it would set a minimum exchange rate target of 1.20 francs per euro.
Read the full article here

Daily Report: Risk Rally Continues Cautiously as Manufacturing Data in Spotlight Today

Risk rally extend mildly today but investors are generally cautious ahead of some important manufacturing data today. Appetite for risks is also dampened mildly by slightly weaker than expected China Manufacturing PMI as well as the surprised rate cut from Brazilian central bank. Euro and sterling are mildly softer as dragged down by rebound in Swiss Franc in EUR/CHF and GBP/CHF. Also, commodity currencies are also losing some upside momentum against the greenback.

Manufacturing data will be a key focus today. China PMI recovered from 29 month low of 50.7 to 50.9 in August but was slightly below expectation of 51. Eurozone manufacturing PMI finalized release will be released in European session today and is expected to be unrevised at 49.7 UK manufacturing PMI is expected to rise slightly to 49.5. Swiss SVME PMI is expected to dropped to 51.2 in August. US ISM manufacturing is expected to dropped to 48.5 in August. If inline with expectation, all, Eurozone, UK and US manufacturing PMI will be below 50, which suggests mild contraction ahead and will raise of risk that the global economy is entering back into recession. Other data to note include Australia retail sales, which rose slightly more than expected by 0.5% mom in July. Swiss Q2 GDP, retail sales, US jobless claims, non-farm productivity and construction spending will also be featured.

Swiss Franc remains firm as markets believe SNB won't intervene for the time being. Switzerland's Economy Minister Johann Schneider-Ammann said yesterday that the country have to "keep living with the strong franc for some time. It must be a combination of measures that will lead us into the future." Meanwhile, the Swiss government also pledged to use CHF 870m for an economic stimulus package to lessen the impact of the strength in Swiss Franc, aiming at supporting tourism, and exports. Technically, USD/CHF, EUR/CHF and GBP/CHF seem to have made short term tops earlier this week and are likely to pare back some of the strong intervention inspired gains. Nevertheless we'd be cautious in particular when EUR/CHF dips back below 1.1 level. It's still believed that SNB is determined to defend parity in EUR/CHF.

While risk appetite remains firm so far, we'd like to point out that stocks should be facing strong resistance in near term and investors would start to be cautious at current level and would likely weight for September's FOMC meeting for Fed to announce new stimulus. 55 days EMA in DOW at 11771 and 11862 resistance should hold in near term at least and traders will use every reason for profit taking, including possibility of poor ISM today and NFP tomorrow. 

EUR/CHF Daily Outlook

Daily Pivots: (S1) 1.1452; (P) 1.1651; (R1) 1.1778; 

Considering bearish divergence condition in 4 hours MACD, EUR/CHF might have made a short term top at 1.1971. Intraday bias is cautiously on the downside for the moment and sustained break 4 hours 55 EMA (now at1.1555) should bring deeper pull back to 1.1163 support and below. On the upside, though, above 1.1971 will extend the strong rebound from 1.0061 towards 1.2399 medium term support turned resistance next.

In the bigger picture, the strength of the rebound from 1.0061 argues it's a medium term bottom and EUR/CHF has turned into a phase of medium term consolidation. Sustained trading above 55 days EMA should bring stronger rise back to 1.2399/3243 resistance zone but strong resistance should be seen there to bring reversal. On the downside, decisive break of parity is needed to confirm down trend resumption. Otherwise, we'll now stay neutral in the cross and expect some more consolidations above there. 

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
22:45	NZD	Terms of Trade Index Q/Q Q2	2.30%	0.60%	0.90%	0.80%
1:00	CNY	PMI Manufacturing Aug	50.9	51	50.7
1:30	AUD	Retail Sales M/M Jul	0.50%	0.30%	-0.10%
5:45	CHF	GDP Q/Q Q2		0.40%	0.30%
6:00	EUR	German GDP Q/Q Q2 F		0.10%	0.10%
7:15	CHF	Retail Sales (Real) Y/Y Jul		4.60%	7.40%
7:30	CHF	SVME-PMI Aug		51.2	53.5
8:00	EUR	Eurozone PMI Manufacturing Aug F		49.7	49.7
8:30	GBP	PMI Manufacturing Aug		49.5	49.1
12:30	USD	Initial Jobless Claims		409K	417K
12:30	USD	Unit Labor Costs Q2 F		2.30%	2.20%
12:30	USD	Non-Farm Productivity Q2 F		-0.50%	-0.30%
14:00	USD	Construction Spending M/M Jul		0.10%	0.20%
14:00	USD	ISM Manufacturing Aug		48.5	50.9
14:00	USD	ISM Prices Paid Aug		55	59
14:30	USD	Natural Gas Storage		61B	73B

Daily Report: Swiss Franc and Japanese Yen Both Slip on Possible Actions by SNB and BOJ

Once again the Swiss franc took center stage and dropped against most major currencies, hitting a 2-week low against the greenback and euro this morning in Asia on persisting speculation that the Swiss National Bank would take further action to weaken the franc. Bet on a EUR/CHF peg intensified after a Swiss newspaper report over the weekend, 

SonntagsZeitung newspaper reported on Sunday that the SNB is likely to set a target rate for EUR/CHF in coming days (probably 17 Aug) above the 1.1000 level. EUR/CHF surged to as high as 1.1325 this morning on such report and USD/CHF also opened higher and rose well above last week's high to around 0.7990. SNB Chairman Philipp Hildebrand and the other policy makers are working closely to seek appropriate plan to stop further appreciation in Swiss franc, some measures had already been taken such as boosting liquidity in money market and cutting rates to zero. Swiss government and lawmakers have expressed their support for the central bank to take drastic measures to curb franc's ascent in order to protect the country's economy. Having said that, some traders considered the speculation of a EUR/CHF peg has been over exaggerated and the franc may rebound this week when traders start realizing such a peg may not materialize. In addition, with U.S. and eurozone still having their own economic problem, Swiss franc remains the major safe-haven target for investors, so if nothing happen on the rumor day of implementation on 17 Aug, the Swiss franc may rally later this week.

The Japanese yen also slipped on fear of possible intervention by Bank of Japan, the Ministry of Finance of Japan Yoshihiko Noda changed his tone and indicated that he is ready to intervene in currency market again. During a television show on NHK, Noda not only said he is closely watching the markets but he would also take decisive and bold action if it becomes necessary as an unstable situation is continuing. EUR/JPY bounced above 110.00 to as high as 110.27 and USD/JPY also marked an intra-day high of 77.10 on Noda's comment. The government echoed Noda's remark and according to a policy overview approved by the cabinet, the government considered the excessive FX moves will hurt economic and financial stability and pledged to take decisive steps when necessary. The government also wanted the BOJ to boost the nation's economy through appropriate flexible policy. However, the Japanese yen then rebounded after the release of stronger-than-expected Japanese economic data, Japan's Q2 GDP shrank at a rate of -0.3%, less than economists' forecast of -0.6%. Macro funds were seen buying USD/JPY since last Friday but offers from exporters in good size are still noted from 77.20 up to 77.40 with some stops seen at 77.30 and 77.50.

The single currency opened higher this morning on the back of rising EUR/CHF and EUR/JPY due to risk appetite as Asian stock markets rebounded following Friday's strength in European and U.S. equities. Stops above 1.4300 were triggered and traders are working on offers reported from 1.4320 up to 1.4350. The single currency may continue to be underpinned on speculation tomorrow's meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy may help easing concerns on French debt crisis contagion. The two leaders are expected to discuss improvement of European governance and expansion of EFSF's role and some traders hope them to come up with some measures to contain the eurozone debt crisis.

EUR/CHF Daily Outlook

Daily Pivots: (S1) 1.0809; (P) 1.0952; (R1) 1.1218; 

EUR/CHF jumps further to as high as 1.1366 so far today and momentum remains strong. It looks likely that 1.1404 support turned resistance will be taken out by the current rebound and that would raise the possibly of medium term reversal. In any case, intraday bias remains on the upside for the moment and break of 1.1404 will target 55 days EMA (now at 1.1635) next. On the downside, below 1.1047 minor support will turn bias neutral and bring retreat. But another rise will now remain in favor as long as 1.0685 minor support holds.

In the bigger picture, while 1.0061 is a short term bottom, there is no indication of trend reversal yet. Whole down trend from 1.6827 (2007 high) is still in progress. Medium term outlook will remain bearish as long as 1.1404 resistance holds and we'd expect an eventual break of parity. Nevertheless, note that a break of 1.1404 resistance will argue that 1.0061 could indeed be a medium term bottom and stronger rebound might then be seen back to 1.2399/3243 resistance zone. 

Daily Report: Dollar's Trades With a Relatively Firm Tone as Moody's and Fitch Affirm U.S. Top Rating

The greenback recovered from record low against the Swiss franc and traded with a relative firm undertone as rating agencies Moody’s and Fitch both affirmed their AAA credit ratings U.S., however, Moody’s Investors Service warned that downgrades were still possible if lawmakers fail to form effective debt reduction measures. After U.S. President Obama signed the bill to lift the country’s debt ceiling and cut spending cut, Moody’s published a statement and indicated that the outlook for the U.S. grade is now negative which signaled it is still possible for a downgrade in the next 12-18 months. The rating agencies also consider the amount of spending cut of US$2.4 trillion is not enough to catch up with the country’s debt (Moody’s suggest an amount of over US$ 4 trillion is needed) and the nation may still face the inevitable default. Swissy tumbled again yesterday and hit another record low of 0.7610 earlier today before recovering, offers are reported at 0.7700-10 and 0.7750 whilst bids are still tipped at 0.7600-10 with stops below there.

With the risk of U.S. default cleared (at least for the near term) and it is going to take times for the lawmakers to come up with measures to cut the nation’s spending, investors’ focus will now shift back to the eurozone debt crisis, recent rise in Italian bond yield started to put pressure on the euro and Spanish-German 10-year yield spread also hit a 400 basis points as a result of speculation that Spain is going to be next country to debt crisis contagion. Euro slipped to 1.4151 yesterday and is still under pressure. Some traders are awaiting the release of economic data from eurozone countries, including German and eurozone service PMI and eurozone retail sales. At the moment, bids are reported at 1.4150-60 with option barriers noted at 1.4150, 1.4100, 1.4050 and also 1.4000, on the upside, offers are tipped in the region of 1.4230-50 and mixture of offers and stops is located at 1.4280-90.

The greenback remained confined against the Japanese yen in narrow range on continued verbal intervention from Japanese officials, Economic Minister Yosano stated that yen’s rise is excessive, Finance Minister Noda supported the comment and both reiterated that the currency’s rally does not reflect economic fundamentals. Bank of Japan Governor Shirakawa joined the team and pointed out that the yen’s gains are negative for the Japan’s economy. We still heard some bids at 76.90-00 and intervention worries should limit downside, on the upside, offers remain at 77.40 and further out at 77.60-80 with stops only emerging above 78.10-20. Traders are awaiting Bank of Japan policy meeting and there are speculations that the central bank may ease policy by increasing asset-buying fund by 5-10 trillion yen as early as this week and the MOF may take this chance to intervene to sell yen.

The British pound is still trading on the defensive side after early release of soft UK manufacturing PMI data (below 50), speculation that Bank of England may expand the QEP in order to stimulate UK economy also seen pressuring the pound. Offers are tipped at 1.6300-10 and mixture of offers and stops is located at 1.6325-30 but better offers are expected around 1.6360-70, on the downside, still see more stops below 1.6220 and 1.6200 (large) with bids ahead of both levels.

EUR/CHF Daily Outlook

Daily Pivots: (S1) 1.0694; (P) 1.0950; (R1) 1.1079;

EUR/CHF's fall is still in progress and drops to new record low of 1.0794 so far today, breaking mentioned 100% projection of 1.2344 to 1.1404 from 1.1891 at 1.0951. Intraday bias remains on the downside and further fall should now be seen towards 161.8% projection at 1.0372 next. On the upside, above 1.0986 minor resistance will turn bias neutral and bring consolidations. But recovery is expected to be limited below 1.1404 support turned resistance and bring fall resumption.

In the bigger picture, whole down trend from 1.6827 (2007 high) is still in progress and in any case, medium term outlook will remain bearish as long as 1.2399 support turned resistance holds. Next target will be 161.8% projection of 1.8234 to 1.4391 from 1.6827 at 1.0609. Nevertheless, break of 1.2399 will be the first sign of bottoming and should bring stronger rebound to 1.3243 resistance for confirmation.

Daily Report: Euro Surges to 2-Weeks High on Debt Crisis Relief

A pretty quiet Asian morning, most currency pairs are consolidating especially in euro and cable after yesterday's rally on eurozone debt crisis relief, the single currency surged to a 2-week high of 1.4440 as EU leaders agreed to allow their regional bailout fund (European Financial Stability Facility - EFSF) to ease terms of loads by extending maturity (from 7.5 years to 15 years) and lowering lending rates (from 4.5% to approx. 3.5%). European officials also let the EFSF to buy bonds in the secondary market in a total of 109 billion euro if it comes necessary to fight debt crisis. Having said that, those die hard euro bears are still skeptical on whether these measures are enough to stabilize the whole crisis affecting Greece, Portugal, Spain and even Italy, rating agencies' assessment are being watched from now. Although euro eased from 1.4440 on some weekend profit-taking after the over 400 points rally this week, bids from sovereign names out of Asia, are starting to appear at 1.4370-80 and more buying interest is tipped at 1.4330-40 with first stops placed below 1.4330 and further out at 1.4285-90. On the upside, only small offers seen at 1.4440-50 with a option barrier at 1.4450 and 1.4500 with more offers ahead.

With eurozone crisis fears eased, the greenback was sold across the board and focus shifted to the progress of the negotiations on U.S. debt ceiling in Washington in order to avoid a U.S. default. U.S. President Obama's team has proposed a deal to the congressional leaders to raise U.S. debt ceiling and cut deficits by about US$ 3 trillion in over 10 years without immediate revenue increases. USD/JPY fell yesterday to as low as 78.22 this morning, stops below 78.40 were finally triggered yesterday as traders were not confident that Japanese officials would actually intervene the fx market, according to option pricing traders are still favoring a yen calls with few demand for yen puts. However, the pair has rebounded this morning in Tokyo as Japan Finance Minister Noda repeated he is watching forex moves closely and recent movements in yen have been one sided. Nevertheless, Economic Minister Yosano gave some opposite comments as he said he doesn't see strength in yen will affect current economic recovery in Japan. At the moment, offers are reported at 78.70-80 and further out at 79.00-10 with some stops above 79.10, 79.35-40 and 79.65-70 whilst on the downside, bids remain at 78.10-20 with barrier at 78.00 (stops below).

The British pound rallied yesterday in tandem with euro and surged to 5-week high of 1.6325 this morning before easing as traders squared long position ahead of weekend, not much news from UK except early less dovish meeting minutes from Bank of England MPC, No data is scheduled to be released today with only IFO index from Germany, orders board is quite light as well, only small offers tipped 1.6330 and 1.6370-80 with stops above 1.6400 whilst bids from Middle East names are located quite far at 1.6250 and 1.6200. 

Elsewhere, the Australian dollar rose overnight to a over 2-month high of 1.0843 after the release of much better-than-expected Q2 import price index, 0.8% versus forecast of -1.1% with export prices surged by 6% against market consensus of 4%, suggesting nation's economy remains strong and seems to have room for more rate hike. We heard bids are lined up from 1.0780 (some stops below) down to 1.0750 and further out at 1.0700 and no major offers reported on the upside.

EUR/CHF Daily Outlook

Daily Pivots: (S1) 1.1641; (P) 1.1720; (R1) 1.1832;

EUR/CHF's rebound from 1.1404 extends further to as high as 1.1822 so far today and breaches 1.1802 support turned resistance as expected. Intraday bias remains on the upside and further rise could now be seen to 61.8% retracement of 1.2344 to 1.1404 at 1.1985. But still we're expecting upside to be limited below 1.2344 resistance and bring down trend resumption. On the downside, below 1.1605 minor support will flip bias back to the downside for a retest on 1.1404 first.

In the bigger picture, whole down trend from 1.6827 (2007 high) is still in progress and in any case, medium term outlook will remain bearish as long as 1.3243 resistance holds. Long term target of 138.2% projection of 1.8234 to 1.4391 from 1.6827 at 1.1516 is already met. But there is no sign of reversal as long as 1.2344 resistance holds. Next target will be 161.8% projection at 1.0609. Nevertheless, break of 1.2344 will be the first sign of bottoming and should bring stronger rebound to 1.3243 resistance for confirmation.

Daily Report: Swiss Franc Surges on Safe-Haven Demand Due to Debt Problems in Eurozone and U.S.

The single currency and the greenback both cam under pressure in the start of the week due to debt woes, Swiss franc benefited and hit record highs against both currencies on safe-haven flows, euro opened lower today and quickly hit fresh low of 1.1365 against the Swiss franc and the Swissy also tumbled below previous low of 0.8080 to as low as 0.8034, the gold also surged to historical high of $1598.41 this morning as investors rushed to a safety place to put their capital due to Eurozone sovereign debt crisis and U.S. debt ceiling problem.

Euro slipped to an intra-day low of 1.4052 against the greenback on the back of intra-day selloff in EUR/CHF on stop hunting (stops at 1.1475) as traders still worry that the widely spreading debt crisis in Eurozone may not find solution in the near future. Former Treasury secretary and currently a Harvard Professor said that the eurozone leaders should take more aggressive measures to the debt crisis and if Europe does not get the crisis under control soon, other G20 countries should put pressure on Europe in doing so. Oh the other hand, the release of slightly better-than-expected EU bank stress tests results (only 8 out of 90 banks failed the tests) did little help to the euro as market participants had not much confidence in the results and traders turn their focus on the next emergency meeting of EU leaders called by German Chancellor Angela Merkel to be held on Thursday in Brussels, hoping the private investors can contribute to finalize the second Greek bailout plan. Stops below 1.4090 were triggered this morning and more stops are tipped below 1.4050 and 1.4000 whilst bids are expected above of these levels. On the upside, offers are located at 1.4100-10 and more at 1.4150-60.

In U.S. there is still very few sign of progress on raising the country's debt ceiling ahead of the 2 August deadline. Democratic and Republican senators will start considering the compromise measure this week, some expect the Democratic-led Senate would pass the legislation whether they can will over the Republican-led House of Representatives remains a big doubt for the time being which indirectly put pressure on the greenback as both rating agencies Moody's and Standard & Poor's already warned last week that they are considering to downgrade U.S. top credit ratings should the debt ceiling not be raised in time. USD/JPY stuck in very narrow range on Japanese holiday today, despite heavy selling in EUR/JPY and AUD/JPY on risk aversion, standing bids from Japanese names between from 78.90 down to 78.60 kept the pair confined in tight trading band and stops below 78.40 seem safe for now.

Cable fell initially in tandem with euro to as low as 1.6065 but found some buying interest from Asia names above 1.6050 and an article from UK Telegraph also helped supporting sterling as it suggested a rate hike by Bank of England may come as early as November according to a prediction done by a big accounting firm. At the moment, bids from Asian names remain at 1.6050 and further out at 1.6000 (stops below) whilst offers are reported from 1.6130 up to 1.6150.

Elsewhere, the release of much better-than-expected NZ Q2 CPI greatly increase the chance for more rate hikes before year end and pushed the kiwi to high as 0.8490, just slightly below last week's 30-year high of 0.8507.

EUR/CHF Daily Outlook

Daily Pivots: (S1) 1.1482; (P) 1.1540; (R1) 1.1587; 

EUR/CHF dives again at the week starts and reaches as low as 1.1405 so far. Intraday bias remains on the downside and further fall should now be seen to next cluster level at 1.0903/23 (100% projection of 1.3243 to 11082 from 1.2344 at 1.0903 and 161.8% projection of 1.3833 to 1.2399 from 1.3243 at 1.0923). On the upside, above 1.1597 minor resistance will suggest short term bottoming and bring rebound to 1.1802 support turned resistance and above.

In the bigger picture, whole down trend from 1.6827 (2007 high) is still in progress and in any case, medium term outlook will remain bearish as long as 1.3243 resistance holds. Long term target of 138.2% projection of 1.8234 to 1.4391 from 1.6827 at 1.1516 is already met. But there is no sign of reversal as long as 1.2344 resistance holds. Next target will be 161.8% projection at 1.0609. Nevertheless, break of 1.2344 will be the first sign of bottoming and should bring stronger rebound to 1.3243 resistance for confirmation.