Will the SNB intervene to raise EUR/CHF floor?

Investors seemed optimistic at year’s start last Tuesday; this optimism reflected in better support for those assets usually perceived as riskier. Asian equities traded in positive territory and in the Forex markets support favoured the euro and the commodity bloc currencies (CAD, AUD and NZD).

Better than expected Swiss PMI and German unemployment data also helped risk appetite to stay afloat- Rudolf Muscat

At week start the euro was up an average 0.13 per cent gaining against the USD, GBP, CHF and the JPY and losing only to the CAD, AUD and the NZD. Amongst the majors the largest losses went to the USD that was down an average 0.68 per cent. Support also favoured the higher yielding currencies such as the Aussie that was up an average 0.55 per cent, the NZD was also up an average 0.55 per cent. The GBP, CHF and the JPY were also in negative territory. All percentages are in relation to the major currencies.

While eurozone December manufacturing data remained sluggish last Monday, equivalent Chinese data over the weekend and on Tuesday morning helped to raise some hopes for the New Year. The actual figure for eurozone PMI manufacturing (a gauge of activity in the manufacturing sector) was confirmed at 46.9, slightly better than November’s 46.4, but still below the 50 level that is the dividing line between economic decline and expansion. This was in fact the fifth consecutive month that the figure was lower than 50.

Tuesday morning China reported stronger than expected Non-Manufacturing PMI for the month of December; which data came out at 56.00 against the previous 49.7. China also released a better than expected HSBC Manufacturing PMI over the weekend.

Better than expected Swiss PMI (out at 50.7 against the previous 44.8) and German unemployment data also helped risk appetite to stay afloat. German unemployment declined more than the expected and the previous reading and the unemployment rate for December declined marginally to 6.8 per cent from the previous 6.9 per cent.

We saw some interesting flows as well towards the EUR/CHF throughout the week ahead of CPI data expected tomorrow. With levels around 1.2170 at the time of writing investors are speculating that if CPI figures continue to point towards deflationary pressures the Swiss National Bank (SNB) could eventually resort to raising the current currency floor of 1.20 against the euro.

The SNB had announced it would be enforcing a 1.20 floor for the EUR/CHF last September – and the announcement has so far helped keep the EUR/CHF in the range of 1.2029-1.2473. Negative readings in the CPI monthly data especially in the second half of 2011 have been fuelling expectations that the SNB will take action to further weaken the Swiss franc (by raising the current 1.20 floor for EUR/CHF).

With such move intended to counter deflationary pressures and economic growth that were impacted by the strength of the Swiss franc – brought about by its safe haven appeal prior to the setting of the 1.20 floor against the euro last September.

From the United Kingdom PMI manufacturing data for the month of December surprised investors positively as actual figures came out higher than the previous and expected ones. Even though the figure remained below the 50 mark it was an encouraging sign of what might be a consolidation.

The EUR/GBP is close to 11 month lows as the eurozone debt saga remains in the background and the UK seems more compact in its fiscal cure. The EUR/GBP is currently trading around 0.8345; the GBP gained close to three per cent when seen against the single currency throughout 2011. For the current week we expect the currency pair to first drift lower towards 0.8300 region, then to bounce higher towards 0.8440.

The weaker data out of the eurozone twinned with the levels of austerity most member countries are embarking on are depicting a gloomy picture for 2012 economic growth. For this reason the next EU leader’s summit is expected to be mostly geared towards economic growth apart from the implementation of the last summit’s agreement.

In the current week we expect the EUR/USD to drift lower while 1.3074-1.3119 offer resistance; whilst a break of 1.3165 could signify more bullishness. Resistance lies in the region of 1.3165-1.3288 while to the downside support is at 1.2951-1.2860.

Upcoming FX key events:
Today: German Retail Sales, UK PMI Services, EZ industrial New Orders, US ISM Non-Manufacturing.
Tomorrow: EZ Retail Sales & unemployment, Canadian Unemployment, US Non-Farm Payrolls, Swiss CPI.

FX technical key points:
EUR/USD is bearish, target 1.2650, key reversal point 1.3550.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is bearish, target 0.9600, key reversal point 1.0745.
NZD/USD is bearish, target 0.7300, key reversal point 0.8239.

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Mr Muscat is a senior trader at RTFX Ltd.