FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
The Swiss franc opened on a soft note in Europe as investors began to price in a strengthening in official resolve to combat the currency’s strength. Yesterday afternoon the Swiss government launched a package of measures for industries affected by the exchange rate and also confirmed the SNB’s authority to set a floor on EURCHF single-handedly if it sees fit to do so. However, government consultation will still be needed if the SNB wishes to impose capital controls at some point in the future. Further liquidity injections and action in the FX swaps market are likely to continue but the effects are expected to be muted, especially as sight deposit levels approach target. Overnight during Asian trading risk softened as growth concerns continue to weigh on sentiment. Japanese authorities noted they are continuing to monitor exchange rates but this hasn’t prevented USDJPY remaining extremely heavy as markets are braced for further disappointments. Ahead today, activity and housing figures aside, inflation numbers are out in the US and any downside surprise in the core figure could further increase expectations of renewed QE. Jobless claims figures are also due. USDJPY traded 76.53-76.72 and EURUSD 1.4383-1.4440.
EUR
The ECB’s 1-week dollar refinancing operation was tapped for the first time since February. The facility was first established during the peak of the crisis to help distribute dollars provided to the ECB via the Fed’s swap lines. The ECB lent $0.5 bn at 1.1% to a single unnamed financial institution, providing another sign that demand for dollar funding is creeping higher. This comes after a week in which EURUSD basis swaps showed dollar demand has risen to levels unseen since Q1 2009.
Headline CPI in the Eurozone was in-line with consensus at +2.5% y/y. The core number was significantly softer however at +1.2% y/y. Our European economist notes that the drop in core CPI is totally driven by a fall in the footwear and clothing components in Italy (due to sales in July). The drop in core is thus temporary and they expect core to stay at +1.2% in August and then jump back to +1.6% in September, when the new clothing season starts.
The regional leaders of the Eurozone have started to offer their opinions on the Franco-German agreements this week and the Luxembourg Finance Minister noting that nothing new was mentioned, but there is a necessity to implement what has already been agreed upon. Meanwhile, other countries continue to stress that the upcoming Greek package must be collateralised for their own contributions – Finland has been very active on this issue and today the Austrian Finance Ministry notes that the Greece collateral model needed to be opened to all Eurozone countries, and is looking for a model where some countries would get more collateral than others.
GBP
Sterling dropped briefly, but sharply, after dovish minutes from the BoE’s August 4 meeting were published. Significantly, MPC members Weale and Dale abandoned their call for an immediate rate hike, and instead voted with the other seven MPC members to keep the policy rate unchanged at 0.5%. The vote split for further asset purchases remained at 8-1. Although only MPC member Posen voted for more QE, it was noted that several other MPC members would be willing to consider additional easing if circumstances were to call for it.
UK labour data was soft yesterday with the claimant count rising by 37k and the ILO unemployment rate increasing to 7.9% (cons. 7.7%). Ahead today retail sales in the UK are due and the market is looking for 0.1%y/y growth in the core figure.
CHF
EURCHF fell sharply on Wednesday morning after the SNB failed to impose an exchange rate target. Instead, less radical policy tools were announced to help weaken the CHF. The bank committed to increasing sight deposits held at the SNB to CHF 200 bn (from the previous target of CHF 120 bn). The SNB also restated its intention to use FX swaps in inject further CHF liquidity. This will likely lead to balance sheet expansion as there are insufficient bills and repos remaining on the SNB’s balance sheet to provide for the full CHF 80 bn in additional liquidity.
At a subsequent press conference government officials announced a CHF 2 bn aid package to help exporters and the tourism industry cope with the strong Swiss franc.
More significantly, Finance Minister Widmer-Schlumpf said the government would support any measure that the SNB thinks is appropriate to decisively weaken the CHF. It was stressed that the SNB is in charge of monetary policy, and that the government would not be involved if the SNB chooses to set an exchange rate floor or a peg. However, the government stated too that other measures such as capital controls would have to be agreed on in consultation with the government. The comments are best interpreted as a public display of government approval for any future intervention the SNB may decide to carry out.
TECHNICAL OUTLOOK
GBPUSD clears 1.6547.
EURUSD BULLISH A move above 1.4536 would open the way towards 1.4697. Initial support lies at 1.4226.
USDJPY BEARISH A break below 76.25, the key low from Mar 17, would expose the psychological level of 75.00. Initial resistance is at 77.31.
GBPUSD BULLISH The rise through 1.6547 has opened the way for further gains towards 1.6661 and 1.6747. Initial support lies at 1.6323.
USDCHF NEUTRAL The near-term directional triggers are at 0.8278 and 0.7549.
AUDUSD BEARISH As long as the resistance at 1.0641, a key retracement level, holds, watch for a move below 1.0406 to expose 1.0331.
USDCAD BULLISH A clearance of 0.9872 would expose 0.9919. Near-term support lies at 0.9742.
EURCHF NEUTRAL The cross has resistance at 1.1781 while support lies at 1.0686.
EURGBP BEARISH The cross now heads towards 0.8643 and 0.8611. Initial resistance is at 0.8830.
EURJPY BEARISH A violation of 108.93 would expose 108.03, a key low from Aug 11. Initial resistance is at 112.71.
SCHEDULE
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