Once again FX markets remained mostly dominated by the deteriorating European financial situation and the concerns over the global economic recovery. Money flows favoured the safer bets in the former part of this week; namely the dollar, Swiss franc and Japanese yen. Yet the Swiss National Bank’s announcement to target a EUR/CHF exchange at 1.20 was a bit of a game changer as it helped push support for the “riskier” currencies, at the expense of the Swiss franc.
From the United States, last Friday’s US non-farm payrolls showed that for the month of August the labour market remained flat. The next Federal Open Market Committee meeting is due on September 20, which as Ben Bernanke announced in his speech at the Jackson Hole Symposium, should be extended to two days to give policy makers more time for a fuller discussion of the options available for further easing.
Speculation of a third round of quantitative easing and the visible impasse in what regards eurozone debt situation, has kept the EUR/USD currency pair volatile and range bound. While the bias for the currency pair remains bearish, on a daily time frame price action has lacked a clear trend.
The ongoing concerns have fed safe haven flows into the USD but support for the USD will likely be capped until the possibility of QE3 keeps looming. If the Fed does embark on a third round of QE, that should give equities a boost but should also erode support for the USD. The eurozone debt situation also continued to offer jitters. Another loss for German Chancellor Angela Merkel in a regional election – held in Mecklenburg-Vorpommern – continued to mount political pressure on her government. The loss was attributed to her handling of the eurozone debt crisis.
Consequently German Finance Minister Wolfgang Schäuble came out strongly last Tuesday – saying that Greece would not be able to receive the next tranche of aid, if reports from the “troika” (IMF, ECB and EC) are not positive. This stance comes on the back of recent rumours that Greece would not be able to meet its set targets.
In addition Finland’s request for collateral with regards to the second Greek bailout has also continued to unsettle investors.
On a daily time frame the EUR/USD seems to be stuck broadly around the 1.4050 – 1.4550 range. To the downside a key level is seen at 1.3907 (the 50 per cent retracement of the January-May rise to 1.4940). To the upside resistance is seen around 1.4450 (the 23.60 per cent retracement of the January-May rise to 1.4940).
For the current week, after the initial bearishness, we see the potential for a recovery towards the 1.4372 – 1.4435 area. Support lies between 1.3945-1.4070 while resistance is at 1.4435 – 1.4674.
Ahead of us today, the ECB and the Bank of England are due for interest rate decision, while the Bank of Canada was due yesterday. We will stand to see whether the respective central banks will project more dovishness. Early last Tuesday the RBA kept policy rates on hold motivated by an unclear path for the global economic recovery – even though the RBA also expressed concern on the inflation outlook.
Last Tuesday around 1000 CET the Swiss National Bank announced its decision to target a minimum exchange rate of 1.20 Swiss francs to the euro. Saying it would be buying unlimited quantities of foreign currency to enforce the target, when needed.
The EUR/CHF soared around eight per cent in less than 30 minutes, rising from around 1.1200 levels to daily highs of 1.2190. The USD/CHF reacted similarly as well; the currency pair rose to daily highs of 0.8570 from 0.7940 levels while scoring around seven per cent in gains.
Last Monday the EZ reported its PMI Services data, actual figures suggested growth was coming in at slower pace. The UK reported its PMI services data as well – actual figures were a disappointment as they came below the expected and the previous reading.
Sterling was up 0.88 per cent, with most of the gains coming from against the Swiss franc; however was mostly down when compared against the rest of the majors. The GBP/USD traded in the range of 1.6021 – 1.6206 earlier this week. For the current week, to the upside resistance is seen at 1.6409 – 1.6592, while to the downside support is seen at 1.5948 – 1.6087.
The EUR/GBP traded in the range of 0.8733 – 0.8819 in the former part of the week. For the current week resistance is seen in the range of 0.8840-0.8931 and support is seen in the range of 0.8702 – 0.8656.
Upcoming FX key events:
Today: BoE Interest Rate Decision and Asset Purchases Target; ECB Interest Rate Decision.
Tomorrow: German HICP and Canadian Unemployment Rate.
FX technical key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is bearish, target 75.50, key reversal point 81.50.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is bearish, target 0.9800, key reversal point 1.1000.
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.