JPM – FX Weekly Update – What to make of the recent EUR/CHF move?

Apr 10, 2012

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Weekly Currency Thought: What to make of the recent EUR/CHF move?

For the first time in a long time, EUR/CHF has been in the limelight last week, with the cross breaking briefly through 1.20. The move was technically driven, very temporary and so one cannot.…

rush into hasty conclusions, but it is worth some thoughts. We argue that from a ‘defending the ceiling’ strategy perspective, the current SNB’s approach may not be optimal. Indeed, the central bank has confirmed a strong commitment to the 1.20 ceiling over the past few months, but why allow EUR/CHF to drift to the 1.20 level to intervene? Would it not make more sense to keep market participants on guard by intervening from time to time within a say 1.2050/1.2175 trading range? That would keep more uncertainty in the market and leave the SNB in a strong position. For now, we do not doubt the SNB’s commitment to the ceiling and we are of the view that the central bank will successfully defend it in the near future, but we have not been impressed by the recent ceiling management. Our view that the mounting deflationary forces prevailing this year have increased the case for a bearish swiss franc outlook remains strongly supported by recent domestic economic news (see March CPI reported negative for the 6th consecutive month), but we also continue to believe that the biggest risk to our bearish swiss franc view is eurozone related, not swiss related. It is no coincidence that last week’s EURCHF move took place in a context of widening intra-eurozone bond spreads and in a generally weaker euro context. This is not the time to change our swiss franc outlook, but we would hope/expect a more pro-active approach from the SNB, or the market could be tempted to retest 1.20 should eurozone debt jitters amplify. The best approach at this point may be not to wait for 1.20 to trade to intervene.

EUR: Returning periphery concerns

There was a feeling of déjà vu last week, with renewed concern over the eurozone periphery and associated widening in intraeuro spreads coming hand in hand with a weaker euro. This time, it is Spain that is catching most of the headlines, with mounting question marks over the country’s ability to stick to its severe fiscal pledges in a recessionary economic climate. On the policy front, as suspected, it was a fairly neutral monetary policy language that emerged from the ECB last week, with additional rate cuts obviously not on the agenda at this stage and exit strategy a very distant prospect too. The euro has broken through important levels versus the USD (at 1.3125/1.3075) last week and appears to be short of supportive forces at this point. Support is seen at 1.3004 while we have resistance at 1.32150 (50 day MAV). It is all thin on the ground on the domestic front this week, with just the latest ECB monthly bulletin and latest inflation data due for release, so the euro’s fortunes could be a function of developments on the bond market again.

USD: Data watch continues post-March NFP

One should never read too much into a one month’s economic data surprise (whether to the upside or to the downside), but the disappointing March employment report released last week certainly justified the cautious policy bias maintained at the Federal Reserve over the past few months. A further 2/3 consecutive disappointing NFP reports would most certainly rekindle QE3 talks and leave the USD at risk of more pronounced weakness again, but we are not there just yet. This implies that in isolation, last week’s soft March employment data is unlikely to translate into fresh bearishness for the USD, especially in a risk-off context. However, it probably means that the market will pay more attention to upcoming economic releases.
This week, the March retail sales, inflation, trade data and most importantly the latest Beige Book, will provide a fresh update on the state of the US economy. We also have a couple of Fed’s members due to speak.

GBP: Brighter signs from the economy helpful

There have been much more encouraging signs from the UK economy last week, with the important and forward looking manufacturing, services and construction PMIs all surprising to the upside in March. This strengthened our view that i) expectations on the UK economy had become excessively bearish and that ii) if anything, there is scope for a positive surprise into H2 – with the Diamond Jubilee and the London Olympics celebrations likely to provide an extra boost to growth. In turn, this means relief over the UK fiscal outlook and this also means a less dovish BoE than initially assumed. All this is in line with our positive bias on sterling over the medium-term. At this point, sterling bulls have to be selective, with the renewed euro weakness leaving cable vulnerable, whilst EUR/GBP is probably still one of the most appealing ways to implement a bullish view on the pound. EUR/GBP broke through 0.8270 and is on track to test the January low of 0.8222. Resistance is found at 0.8350.

JPY: Be aware the BoJ this week

It will be all eyes on the BoJ regular policy meeting this week. Political pressure for additional easing and/or for a further increase in the inflation target (to 2% from 1%) is rising and we believe that it is only a matter of time before another round of monetary stimulus is unveiled. Waiting for the release of the BoJ semi-annual outlook (which include updated growth forecasts) would provide a more opportune time for the central bank, but a policy action is feasible this week too. This is a testing time to the weaker yen strategy as the combined renewed worries over the eurozone periphery/disappointing US employment report would have set an ideal environment for
yen bulls just a few months ago. We have been and remain of the view that on its own, a more dovish BoJ is not enough to reverse the bullish long-term yen trend. This does not preclude phases of temporary weakness, but the very recent change in risk climate presents a first test for the BoJ.

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