After moving lower EURUSD as expected but then rallied quite strongly and turned a down day into a close above the opening price for the day. The rally started after the pair reversed below my 1.1230 support at 1.1214 and was intensified by the US CPI figures. The headline CPI came in at disappointing -0.1% while the core CPI remained unchanged at 0.1%. A negative print on August CPI gave the Fed a last minute reminder that it continues to be well shy of its inflation mandate. This gave the markets a reason to sell the USD almost across the board. Only USDJPY bucked the trend yesterday. EURUSD then ran into a resistance slightly above my 1.1305 resistance and is trading sideways underneath it at the time of writing. This created a pin bar and a higher low in the daily chart. A pin bar that creates a higher low is a positive indication in this context and this has encouraged traders to push the price higher today. There however is a pivotal resistance ahead (1.1328 – 1.1373) while support levels are at 1.1230 and 1.1196. This being the Fed day I don’t expect the markets to push through the resistance into new highs before the rates announcement.
EURCHF is fractionally lower following the SNB announcement of unchanged policy and renewed pledge to intervene in the currency market if needed to counter franc appreciation. The central bank continues to class the franc as being “significantly overvalued.” EUR-CHF dipped to the 1.0950 from pre-announcement levels around 1.0975, which is little more than a 0.2% decline, and the cross remains well within the range it posted yesterday. Swiss policymakers have had success in undermining the franc’s status as a safe haven, with deeply negative deposit rates having caused a steady drip feed of yield-searching Swiss fund outflows. The franc is trading nearly 6.5 % lower than levels seen a couple of months ago, and the cross last week traded above 1.1000 for the first time since the SNB abandoned its former cap on the franc in January.
ECB and SNB – Waiting for the Fed: ECB council members continued to sound dovish as the focus shifts to tomorrow’s FOMC announcement. If the Fed delays the start of the tightening cycle it will make additional easing moves by the ECB more likely and that in turn would likely see the SNB follow suit with additional steps. Officials may be eager to stress that China’s exchange rate adjustment was not the start of a global currency war, but at least in Europe, it would well start to look like one.
FOMC Forecast revisions to be released at Thursday’s FOMC meeting should reveal sharp reversals of the June FOMC revisions for GDP and the jobless rate, as growth prospects should be boosted despite global market volatility. We expect all the 2015 GDP forecasts to be raised by 0.4%-0.6% after June’s downward bumps of 0.4%-0.8%, while all but the lowest jobless rate estimates are lowered 0.1% across the 2015-2017 period after 0.1%-0.2% June boosts in the lower end estimates. We believe policymakers low-balled their estimates in June to facilitate upward revisions at this month’s meeting that would help to justify rate lift-off. The 2015-16 PCE chain price estimates were also low-balled in June, though we do expect 0.2%-0.3% downward bumps for 2015. The core PCE chain price figures have tracked official projections, though forecast ranges may be narrowed. We expect big downward bumps in the high-end Fed funds estimates, as officials “tap down” rate expectations in keeping with a “one and done” 2015 rate strategy.
Currency Movers Charts
New Zealand’s Q2 GDP grew at a 0.4% pace (q/q) following the 0.2% clip in Q1. The increase in Q1 undershot projections and leaves another quarter of disappointing growth for New Zealand’s economy. On an annual basis, GDP slowed to a 2.4% y/y pace from the revised 2.7% y/y clip in Q1 (was +2.6%). Growth has slowed considerably this year from the 3.5% y/y rate seen in Q4 of 2014. The slowing in annual growth is supportive of further rate cuts from the RBNZ.
The result has been that money has flowed away from the NZD benefitting especially USD, EUR and GBP. NZDUSD is down slightly at the levels it opened yesterday morning while EURNZD is trying to move up after forming a doji candle yesterday. GBPNZD is trading near a pivot high candle after yesterday’s rally and the advance today in the Asian session. All in all price action seems to be muted as markets wait for the Fed.
Main Macro Events Today
The SNB Interest Rate Decision. The Swiss central bank did the expected and maintained the central Libor target and the deposit rate at -0.75%. The SNB sees growth picking up gradually in the second half and headline inflation in positive territory at the beginning of 2017. The statement highlighted that the CHF remains overvalued and confirmed the central bank’s commitment to intervene in forex markets if necessary. The statement highlighted growing uncertainty about developments in China and risks to the world growth outlook. The SNB will be watching Fed and ECB decisions carefully in coming months and if the ECB widens its QE program, the SNB could well react or pre-empt a move by cutting the deposit rate again even before the next policy review in December.
US Housing Starts: August housing starts are out today and we expect the headline to decline 3.0% to a 1,170k (median 1,160k) pace from 1,206k in July. The July headline marked a high back to October of ’07. Also in the report is the latest data on permits, which we exepct to climb to 1,135k from 1,130k in July and completions, which are seen at 1,010k from 987k. Early data on housing for August remained firm with the NAHB at 61.
US Initial Jobless Claims: Claims data for the week of September 12th are published today and should reveal a 282k (median 275k) headline from 275k last week. Claims are continuing to strike a firm path and we expect the September average to be 275k which would be steady from August, though above the 272k July average. This continued strength supports our September forecast for a 205k non-farm payrolls.
The Fed Interest Rate Decision.