- EURUSD may decline to 1.0809 as the market wonders how the ECB’s QE will be altered
- SNB won't increase substantially its balance sheet but likely decrease key interest rates to prevent the CHF from appreciating further against the single currency
- We expect the Swiss franc to remain under buying pressure
- USD/CAD stabilising around the 1.3145 level as the market awaits the new batch of economic data from the US as well as the next FOMC rate decision on Wednesday
EUR/USD broke a few supports last week, making it clear that the bullish momentum is at an end. The pair escaped its ascending channel to the downside and crossed its 200dma downwards, indicating an end to the medium-term uptrend. In spite of recent easing selling pressures, the risk remains on the downside for most EUR-crosses as the market wonders how the ECB’s QE will be altered. On the downside, the closest supports stand at 1.0848 and then 1.0809 (low from August 5th and July 20th, respectively) but for now the $1.10 threshold seems to hold ground.
After a period of relative calm for the Swiss franc, EUR/CHF reached 1.0758 on Friday, bringing the SNB out in a cold sweat. The big question now is what can the SNB do to prevent the CHF from appreciating further against the single currency. The SNB’s balance sheet has continued to expand steadily over the last few months as Thomas Jordan tries to protect the Swiss economy as best he can. We do not believe that the central bank will substantially increase its balance sheet; the intervention will therefore be of a moderate size. We also think that a modification of the exemption threshold, set at 20 times the reserve requirement ratio, is highly unlikely as it would transfer the burden onto the small savers. In our opinion, a decrease of the key interest rates is the only reasonable option. In the meantime, we expect the Swiss franc to remain under buying pressure as the market is well aware that the SNB has now been cornered by the ECB, pushing the Swiss central bank back in the spotlight. We are bearish EUR/CHF and wouldn’t be surprised if the pair goes back below 1.06.
***Yann Quelenn, Market Analyst: “Over the past seven years, the employment situation in the euro zone has been becoming increasingly difficult. France is no exception on the continent with the total number of French Jobseekers having increased by more than 80%. In 2008, around 2 million French people were seeking employment. This figure now stands at over 3.5 million. Today’s data is expected to see a net increase of 3000 more jobseekers. Air France and Fram (the French travel agency) are at the heart of these problems, Air France is now being restructured and Fram set to close.
We believe that this increase in job seekers is just the beginning. France is still paying the price of deindustrialisation. Its trade deficit remains very large, at around 3€ billion. Moreover, the inability to debase its currency to be more competitive only paves the way for more austerity policies. A perfect example of France’s struggle is their debt-to-GDP ratio, which is exploding. Officials have stated that the French economy would not be sustainable with a ratio above 90%. Now that the French ratio is way above this threshold, we can wonder about the health of its economy. Over the long haul, we remain bearish on the single currency.”***
In Canada, consumer price index fell more-than-expected by 0.2%m/m in September (versus -0.1%m/m expected), compared to a flat reading in August. USD/CAD jumped to 1.3201 in the Asian session as the BoC decided to keep rates unchanged in spite of persistently weak economic data. USD/CAD has stabilised around the 1.3145 level (Fib 50% on September-October debasement) as the market awaits the new batch of economic data from the US as well as the next FOMC rate decision (on Wednesday). We anticipate the Fed will, unsurprisingly, leave its key rates unchanged. However, the market will focus on the accompanying statement to get some fresh insight into the Fed's thinking.
On the equity front, Asian regional markets continue to rise this morning. The Japanese Nikkei was up 0.65%, while the Topix index rose 0.72%. In mainland China, stocks edged higher on strong gains from tech companies, the Shanghai and the Shenzhen Composite climbed 0.50% and 0.68% respectively. On the other hand in Hong Kong, investors let the Hang Seng move into negative territory, down -0.29%.
Today traders will be watching German IFO; new home sales and Dallas Fed manufacturing activity index from the US; weekly trade balance from Brazil; trade balance from New Zealand.