FX - Euro Back in Spotlight As SNB Action Digested by Markets

• SNB move fading as Eurozone stress comes back into picture
• Concerns that Greece will not receive next tranche of bailout
• Australian GDP comes in stronger than expected; construction data weaker
• Bank of Japan leaves rates and policy unchanged as widely expected
• FinMin Azumi offers nothing new on the strength of the Yen
• UK and German industrial production data on tap
• Bank of Canada rate decision due up later today

The detracted attention from the Eurozone on Tuesday was well appreciated after regional markets had been getting slammed on an overall deterioration within the local economy. The SNB announcement to aggressively intervene on behalf of the Franc in an effort to prevent further appreciation in the currency resulted in some unprecedented one day moves, with the Franc selling off by over 8% against many of the major currencies in a matter of minutes. However, it seems as though the storyline is now fading just a bit, with the more dominating and broader theme of Eurozone financial market stress coming back into the picture. Market chatter is now circulating that Greece will not receive the next tranche of the bailout unless the conditions of the bailout are met, and any delay in assistance to the beleaguered Greek economy would bring with it an upgraded threat to the Eurozone debt crisis and new wave of risk aversion.

But things have not been all bad on Wednesday, with the Australian Dollar finding some bids out from its sub-1.0500 weekly lows. A better than expected GDP result has helped to propel the currency higher by some 1% on the day and market participants continue to favor the antipodean as a viable alternative in a backwards market environment where safe haven currencies are no longer attractive and the higher yielding currencies are considered the new safe haven option. Still, we have a hard time digesting this logic and see the Australian Dollar at risk for further depreciation over the coming weeks and months. While GDP was indeed better than expected, the overall impression of the Australian economy in recent months has been less than formidable, and economic data is still showing signs of further deterioration. Other data released on the day is a testament to this fact, with Aussie performance of construction coming in on the softer side as the data series continues to contract. The Housing Association in Australia is also sending a much less positive message and has been urgently pressing the government for stimulus measures in an effort to prevent a major decline in building activity.

Elsewhere, the Yen has been able to find some welcome offers against the buck, albeit marginal, following the massive wave of CHF depreciation on Wednesday. However these setbacks are far from encouraging for local officials who would welcome a more significant depreciation in the currency which trades just off record highs against the US Dollar. As expected, the Bank of Japan has come out on Wednesday leaving its call rate unchanged at a range of 0-0.10%, while refraining from adopting additional easing measures. The policy decision brings with it nothing new or enlightening, although the central bank does mention the ongoing global uncertainties with specific reference to US and Europe debt problems. Newly appointed FinMin Azumi has also offered nothing exciting in terms of potential market moving comments after saying that he is “watching FX moves with interest.” It appears thus far that Mr. Azumi’s stance on the Yen and potential intervention is far less Yen bearish than his predecessor who had been more comfortable threatening of the potential for official action.

Looking ahead, UK and German industrial production are the key releases due in the European session, while Canada take the spotlight in North America with the Bank of Canada set to decide on rates. Markets are expecting no change to interest rates which currently reside at 1.00%. The Fed’s Beige Book will be the key US release, while on the official circuit, Fed Evans and Fed Williams are on the docket. US equity futures and oil prices have been tracking moderately higher, while gold is under decent pressure into the European open.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market still remains confined to a broader consolidation since April, with rallies well capped above 1.4500 and pullbacks finding decent support below 1.4000. However, the contraction in volatility over the past several months warns of a near-term breakout and given the more bearish structure on the monthly chart which suggests the formation of a longer-term lower top by 1.5000, we project the breakout to be to the downside. In the interim, look for setbacks to establish below 1.4000 over the coming sessions, with any intraday rallies expected to be well capped ahead of 1.4200. Tuesday’s bearish close below the 200-Day SMA is significant as the market has not been able to achieve this feat since early 2011.

USD/JPY:Although the market recently broke to fresh record lows below 76.00, failure to establish any downside momentum on the break suggests that the market could be looking to establish a more meaningful base. The latest daily close back above 77.30 encourages recovery outlook and we look for additional upside over the coming sessions back towards critical short-term resistance by 80.25. Back above 77.75 should confirm and accelerate while ultimately, only a daily close below 76.50 delays constructive outlook.

GBP/USD: The market remains locked in a broader consolidation off of the April highs, and a fresh top is now sought out by 1.6600 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a daily close above 1.6550 would delay outlook and give reason for pause, while the latest daily close back under the 200-Day SMA should accelerate declines. In the interim, look for any intraday rallies to be well capped below 1.6200 on a daily close basis.

USD/CHF: The latest sharp reversal off of record lows just shy of 0.7000 is encouraging and could finally be starting to signal the formation for a major base. Weekly studies and monthly studies are also confirming with the formation of a very bullish bottom close. The latest acceleration of gains beyond critical resistance and a previous lower top at 0.8550 further confirms bullish bias and from here, we see room for fresh upside towards the 0.9000-0.9500 area over the coming days. Look for any setbacks to now be well supported above 0.8000 on a daily close basis.

Written by Joel Kruger, Technical Currency Strategist

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