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Risk-off sentiment pushes yields lower as GBP heads south, SNB expands balance sheet to mitigate pressure on swissie

- GBPUSD: It is hard to tell how far the pound can actually fall, but given the uniqueness of this event we suspect that it still has some downside potential with the 1.25 level as next support

- The Japanese yen surged strongly and hit 100.58 against the US dollar as investors piled into safe haven assets

- CHF weakened against the USD, while the yen surged against the greenback, suggesting that the SNB has convinced the market of its determination to prevent further appreciation of the Swiss currency

- Commodity currencies were under heavy cross-fire as crude oil prices slid further and sovereign yields took a hit

- The single currency was also under selling pressure, mostly against the JPY and the USD as risk sentiment worsened

- Gold strengthened further, boosted by the strong haven demand, closest resistance can be found at $1,392.33 

- Silver will soon test the $21 resistance level again

- The SNB’s total sight deposits largely increased week ending July 1st by CHF 6.3 billion to 507.5 billion just a week after Brexit. This was the biggest increase since the abandoning of the peg in January 2015

- SNB may trigger further, even more significant measures to protect its currency and its economy.

 

The pound sterling fell below the 1.28 threshold amid renewed concerns about the impact of Britain’s decision to leave the European Union on global growth. GBP/USD reached 1.2798, the lowest level since June 1985 before stabilising at around 1.29. It is hard to tell how far the pound can actually fall but given the uniqueness of this event and especially the fact that there is no historic benchmark, we suspect that the pound sterling still has some downside potential with the 1.25 level as the next support.

The Japanese yen surged strongly and hit 100.58 against the US dollar as investors piled into safe haven assets. Similarly, but to a lesser extent, the Swiss franc surged slightly against the single currency, with EUR/CHF sliding as low as 10794 before bouncing back to 1.08. Most interestingly, the CHF weakened against the USD (-0.15%), while the yen surged 0.75% against the greenback, suggesting that the SNB has convinced the market of its determination to prevent further appreciation of the Swiss currency.

Commodity currencies also had a tough night with the Aussie falling 0.50% against the greenback, the Kiwi slid 0.90%, while the NOK fell 0.35%. Commodity currencies were under heavy cross-fire as crude oil prices slid further and sovereign yields took a hit. The West Texas Intermediate fell as low as $46.15 a barrel in Asia, while the international gauge, the Brent crude, slip as low as $47.53 a barrel. Australian 10-year treasury yields printed a new all-time low at 1.84%. Similarly, New Zealand 10-year treasury yields fell to 2.22%, a fresh all-time low.

The single currency was also under selling pressure, mostly against the JPY and the USD as risk sentiment worsened. EUR/JPY slid to 111.04, while the EUR/USD hit 1.1036 as German treasury yields set another all-time record with the 10-year -0.1904%.

Gold strengthened further, boosted by the strong haven demand. The yellow metal tested $1,371.39 an ounce before stabilising at around $1,366, up 0.72%. The closest resistance can be found at $1,392.33 (high from March 2014). Silver rallied 1.41% to $20.51 and will soon test the $21 resistance level again.

Yann Quelenn, market analyst: Will SNB measures be sufficient?: The Swiss National Bank is expanding its balance sheet in an effort to mitigate upside pressures on the Swiss currency. The size of the total sight deposits increased significantly during the week ending July 1st. These grew by CHF 6.3 billion to 507.5 billion just a week after Brexit. What we now find concerning is the size of the balance sheet which is over 100% of the annual Swiss GDP. The pace of the increase has not been so fast since the abandonning of the peg in January 2015.

We feel that the negative rates policy and FX intervention are not likely to be sufficient to relieve pressure from the uncertain economic and market conditions. The CHF should continue to suffer from its traditional safe haven status. It remains largely overvalued and deflation pressures should persist. In fact, we do not believe that current monetary policy will increase inflation.

The SNB is also on high alert for further EU developments in particular the risk of an EU dislocation. This possibility is growing, Finland has now also launched a petition to signal their intention to leave. More significant SNB measures are on the cards as the central bank stands ready to protect its currency and economy.”

Today traders will be likely focussed on the broad-based sell-off rather than the economic calendar. However, a few key economic indicators are due for release today: industrial output from Spain; Riksbank interest rate decision from Sweden; Markit retail PMIs from France and Germany; MBA mortgage application, trade balance, Markit services and composites PMIs and ISM non-manufacturing from the US.

Wednesday, 06 Jul, 2016 / 8:46

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Source : http://swissquote-fx.com/en/research-and-analysis/

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