SNB determination reflected in the Swiss franc

After markedly volatile trading throughout last week, we saw risk aversion ease slightly at this week’s start. Japan reported a preliminary Q2 GDP figure which was not as bad as had been expected. Figures showed however that the Japanese economy was still experiencing contraction, actual figures came in at -0.3 per cent, better than the expected -0.6 per cent and the previous -0.9 per cent.

Asian equities reacted positively to this data; the bout of optimism was also present in the FX markets despite the weaker US data, reported last Monday. For the former part of this week, up to the time of writing, the euro was up 0.65 per cent, the GBP was up 0.38 per cent, while the USD was down -0.28 per cent, the Swiss franc was down -0.47 per cent and the Japanese Yen was down -0.16 per cent.

Even US equities traded in positive territory last Monday as M&A news helped to keep hopes for the economic recovery alive. Investors were also looking forward to a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy that took place in Paris last Tuesday.

Ahead of the meeting hopes were rising for a new way forward with regards to the issues revolving around this debt crisis. The eurobond alternative was also reiterated by the Italian Economy and Finance Minister Giulio Tremonti – but both French and German government representatives stated that eurobonds did not feature in the agenda for the meeting.

Earlier this week the EUR/USD was trading in the range of 1.4253 to 1.4472, with biggest gains for the euro made throughout Monday. Currently, given the situation, we are neutral on the currency pair. On the weekly time frame we see resistance in the 1.4400 - 1.4550 region and support at 1.4102 - 1.3953.

After its attempt to rise higher we see a probability that the EUR/USD will drift lower towards the 1.4102 limit.

The Swiss franc remained in focus after the Swiss National Bank managed to relay its determination (to come out strongly against the strength of the Swiss franc) to the FX markets. While the Swiss franc weakened throughout the end of last week, fuelled by talks of a possible pegging of the CHF to the euro, its weakening lost pace at the start of this week.

An important Swiss government meeting was to be held yesterday where the Swiss government had to discuss new measures to counter the Swiss franc’s strength in order to safeguard Swiss industry.

Data from the eurozone, in the former part of this week, showed a disappointing preliminary figure for German Q2 GDP that came out at 0.1 per cent against the previous 1.5 per cent and the expected 0.5 per cent. The yearly figure slipped lower as well to 2.8 per cent against the previous 5.2 per cent and the expected 3.2 per cent.

The preliminary GDP figures for the eurozone as a whole showed some sluggishness, as they slipped to 0.2 per cent for Q2 against the previous 0.8 per cent and the expected 0.3 per cent. The yearly figure came out at 1.7 per cent lower when compared to the previous 2.5 per cent. The eurozone also reported a positive trade balance at €0.9 billion, higher than the previous €0.2 billion.

Last Monday the European Central Bank announced bond purchases amounting to €22 billion under its Securities Markets Programme throughout last week. The announcement was in line with reports circulated in the media that the ECB was buying Spanish and Italian debt.

UK CPI data for the month of July inched higher; actual figures for the month showed a 0.0 per cent compared to the previous and expected -0.1 per cent. The yearly figure rose as well to 4.4 per cent from the previous 4.2 per cent and the expected 4.3 per cent.

Although this data reflected into support for the GBP immediately after the data was released, gains were expected to be limited by the dovish stance still expected from the BoE. It also poses a dilemma given the British central bank has to try to balance the possibility of further quantitative easing and the inflationary pressures – which have till now been played down as short term and expected to fall within the next two years.

EUR/GBP has traded in the range of 0.8749 - 0.8829 earlier this week. On a weekly time frame we see resistance in the 0.8872 - 0.8991 region, while support should hold the pair at the 0.8649 - 0.8544 zone. Against the USD the GBP has traded in the range of 1.6256 - 1.6409. We expect the GBP/USD to encounter resistance to the upside at 1.6464 - 1.6650 and to the downside support at 1.6103 - 1.5926.

Upcoming FX key events:
Today: UK Retail Sales, US CPI and Philadelphia Fed Business Index,
Tomorrow: German PPI, UK Public Sector Net Borrowing and Canadian CPI.

FX technical key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is bearish, target 76.00, key reversal point 81.50.
GBP/USD is neutral.
USD/CHF is bearish, target 0.7000, key reversal point 0.8500.
AUD/USD is bearish, target 0.9800, key reversal point 1.0800.
NZD/USD is bearish target 0.7800, key reversal point 0.8800.

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Mr Muscat is a senior trader at RTFX Ltd.