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Friday, 16 Dec 2011
Will Investors Test the EUR/CHF Floor?
Following the decision by the SNB to keep the EUR/CHF floor unchanged at 1.20, the CHF strengthened the most since September. As the European debt crisis comes to a head, perhaps this could be the time investors test the will of the SNB to hold the floor of the EUR/CHF.
CHF - Will Investors Test the EUR/CHF Floor?
Following the decision by the SNB to keep the EUR/CHF floor unchanged at 1.20, the CHF strengthened the most since September. As we suspected, the SNB decided to take the more conservative approach and not make a move to raise the floor of the EUR/CHF to 1.25 or 1.30. The SNB will continue to enforce the 1.20 level and left interest rates unchanged near 0%. The Swiss central bank also noted slight growth in the global economy but an escalation of the European debt crisis threatens the economic outlook. Swiss inflation forecasts were downgraded and the bank projects deflation creeping into the Swiss economy. In 2012 the SNB expects the price level to fall by 0.3%.
There can be no doubt of the link between CHF strength and the European debt crisis. Expectations are building for a French downgrade from S&P following the disappointing EU summit. With Italian bonds once again testing the 7% yield threshold (it was only 1-month ago we were saying the threshold was 6%) it appears the European debt crisis is coming to a head. As the EUR continues to weaken and investors look for safe haven currencies this may be the time the market begins to test the resolve of the SNB to hold the EUR/CHF floor at 1.20. The first test may come at the pair's 200-day moving average at 1.2200.
EUR - Increasing Expectations for a French Downgrade
The French appear set on managing expectations for an apparent downgrade of France's AAA credit rating by S&P. Yesterday ECB member and Bank of France Governor Christian Noyer was quoted as saying a French downgrade, “Does not appear to me to be justified when considering economic fundamentals.” France is the second largest contributor to the EFSF and there could be knock-on effects of a French downgrade.
Yesterday's European data was positive with better than expected PMI surveys for both the manufacturing and services sectors. In particular, Germany's manufacturing PMI climbed to 52.7 from 50.3 as the engine of the European economy chugs on. The positive data is a welcomed event but additional PMI surveys for the remainder of Europe remained below the 50 boom/bust level. Thus the surveys should not shift market expectations which are for the euro zone economy to slip into a recession next year.
The EUR/USD goes into the last day of trading for the week with support at Wednesday's low of 1.2945 followed by the 2011 low at 12870. Resistance is found at the November 20th high of 1.3260.
JPY - USD/JPY Moving Towards 4-year Trend Line
Yesterday's manufacturing survey from Japan was not inspiring though the Chinese PMI was more encouraging. The Japanese Tankan survey came in weaker than expected at -4 on expectations of -2. The Chinese flash HSBC PMI climbed to 49 in the month of December from 47.7 in November. The survey was below the 50 boom/bust level for the 2nd month in a row but the improvement is encouraging.
Despite the negative Japanese data the USD/JPY appears to be taking its cues primarily from the movements of the USD. Yesterdays' strong US Empire State Manufacturing Index and lower than expected weekly unemployment claims provided a pause in the bearish market sentiment and allowed for the USD to come off of its highs across the board.
Should the near-term trend of USD strength continue the USD/JPY could test the June 2007 trend line which comes in at 78.50. A break here will expose the post-intervention high of 79.50. To the downside the December 8th low of 77.15 may be supportive.
Gold - Look to the USD Index
Commodity prices all took a plunge on Wednesday with crude oil down 5% and gold plummeting almost $100. A tepid rebound was seen on Thursday but the retracements pale in comparison to the price declines.
There have been multiple theories for the decline in commodity prices floating around on the forex blogs, some ranging from bearish technicals, central bank selling, or a liquidation squeeze. We believe that a strong USD has been weighing on commodity prices. This trend of lower commodity prices could continue given the USD index (DXY) is now trading at its highest level of the year.
The 20-day moving average is now at 1.3420 and has served as a significant resistance level with the EUR/USD last closing above this line on November 3rd. While weekly stochastics are beginning to look oversold the monthly stochastics still have room to move lower. With the downtrend firmly entrenched the supports from the November low of 1.3260 and the October low of 1.3145 are within striking distance. A move higher may find willing sellers at the December high of 1.3550 and the November 18th high of 1.3610.
Sterling has been caught in a range trading environment between the levels of 1.5780 and 1.5660 where the 55-day moving average is found. With daily and monthly stochastics moving lower the November and October lows of 1.5420 and 1.5270 look to be within reach. Resistance for the GBP/USD can be found at the November 18th high of 1.5890 followed by the falling trend line from the August high which comes in at 1.5925.
The doji candlestick from December 8th stands out as the day's low coincides with both the 55-day and the 100-day moving average. This may be the start of a base being formed for a test of the June 2007 trend line which comes in at 78.50. A break here will expose the post-intervention high of 79.50. To the downside the November 18th low of 76.55 is the last support prior to the pair's all-time low at 75.56.
The pair continues to struggle to overcome the 0.9330 resistance level despite multiple attempts to move higher. A concerted move higher may find resistance at the 20-month moving average of 0.9380 followed by this year's high of 0.9780. The downside may be capped at the support of 0.9065 which coincides with the pair's 55-day moving average. Additional support is located at the November low of 0.8760.
The Wild Card
The daily stochastics for the USD/CAD are looking oversold as the pair approaches 1.0470 from the resistance line off of the October and November highs. Forex traders should note that a move lower in the pair could find support back at 1.0090 where the rising trend line from the July and December lows come into play. The 100-day moving average is also at 1.0080, a level that has proved to be supportive in October.
|20:00||USD||Federal Budget Balance||-64.4||93.8B||-|
|01:30||AUD||Westpac Consumer Sentiment||-5.6%||-||-|
|01:50||JPY||M2 Money Stock||y/y||4.2%||4.3%||-|
|10:30||GBP||Average Earnings Index 3m/y||2.9%||3.1%||-|
|10:30||GBP||Claimant Count Change||1.2K||-2.3K||-|
|11:00||CHF||ZEW Economic Expectations||9.7||-||-|
|14:30||USD||NZD Core Retail Sales||m/m||0.1%||-0.1%||-|