Daily Report: Greenback Drops across the Board on Disappointment of FOMC

The greenback nose-dived against the invincible Swiss franc for over 500 points or 6% yesterday to a record low of 0.7068 and selling gathered momentum after disappointment on the Federal Reserve announcement. The Fed kept rates unchanged as expected and only pledged to keep interest rates near zero until 2013, although the committee indicated they are noted that economic growth has slowed considerably, no word was mentioned on the implementation of QE3. Some traders sold dollar immediately as they found the statements with no surprises, the greenback was down across the board with EUR/USD surged to 1.4398 and cable also rebounded from low of 1.6176 to 1.6336 overnight.

Having said that, the commitment to keep rates low for 2 years helped U.S. equities to rebound strongly yesterday (DJI +3.98%, S&P 500 +4.74% and NASDAQ +5.29%), posted a best single day performance in 2-year. This rebound indirectly helped to greenback to rebound from record low against the Swiss franc back to above 0.7200 level. With the Swiss franc rallying against almost all other currencies, traders are speculating the SNB may have no choice but to take action again like last week to intervene. The SNB unexpectedly cut benchmark rate to 0-0.25% last week and reaffirm their pledge to stop the massively overvalued franc from further appreciation which they considered harmful to the country’s exports. Nevertheless, with eurozone and U.S. both in debt crisis, heavy safe-haven demand continued pushing the franc higher and higher, EUR/CHF almost hit parity yesterday and made a fresh record low of 1.0075 before rebounding. The SNB had been increasing its holdings of foreign currencies in order to curb franc’s rise, however, the policy resulted in over $21 billion losses last year (and $10.8 billion in H1 2011) which threatened the position of SNB President Hildebrand. Traders basically believe the central bank may not be able to do much to stop the franc from surging and feel quite comfortable buying the franc against other major currencies.

Another central bank that intervened the market last week was Bank of Japan, however, all the effort made vanished as the pair just dropped below the level right before BOJ started selling yen (76.78), recovery in Nikkei 225 had little impact on the currency pair. Verbal warnings from Japanese officials had no impact at all to the forex market, traders need to see some concrete action and they believe just by BOJ itself, it would not be enough to stop the yen from rising and a retest of record low formed in March at 76.25 looks quite possible. MOF Noda said he is still watching the market closely and will continue to talk with other countries for cooperate actions to encounter speculative and disorderly moves. Once again, Japanese margin traders are reported to start building long USD/JPY positions at current level just like what happened last month, hoping the MOF would defense the post earthquake record low of 76.25 and sizeable stops remain at 76.20 and 75.90-00.

Although the unrest and youth riots in London together with soft UK production hurt sterling yesterday and pressed cable down from 1.6411 to as low as 1.6176, cable rebounded overnight on dollar’s broad-based weakness. Some traders also refrained from selling the pound to heavily ahead of today’s Bank of England inflation report to be released at 9:30GMT. Investors are closely watching the report with concerns that BOE Governor King may lower the economic forecast and provide a more dovish tone in the report in wake of current turmoil in financial markets. There are also some speculations that the BOE may expand the QEP from the current GBP 200 billion.

USD/CHF Daily Outlook

Daily Pivots: (S1) 0.6983; (P) 0.7288; (R1) 0.7509;

USD/CHF's decline extends to new record low of 0.7065 so far, meeting mentioned target of 261.8% projection of 0.8519 to 0.8081 from 0.8277 at 0.7130. Intraday bias remains on the downside with 0.7361 minor resistance intact and further fall should now be seen to medium term target of 138.2% projection of 1.1730 to 0.9462 from 1.0065 at 0.6931 which is close to 0.7 psychological level. Above 0.7361 minor resistance will turn bias neutral and bring consolidations first.

In the bigger picture, long term down trend from 1.1730 is still in progress and is accelerating by taking out the medium term falling channel support. There is no signal of bottoming yet. Such decline is expected to continue for 138.2% projection of 1.1730 to 0.9462 from 1.0065 at 0.6931 which is close to 0.7 psychological level. On the upside, break of 0.8275 resistance is needed to be the first sign of medium term bottoming or we'll stay bearish in the pair.