The second reading of US Q1 GDP was somewhat disappointing; consensus estimates were looking for upward revisions to 2.2% QoQ annualized, but instead the figure remained at the originally reported level of 1.8%. Softer growth in real consumption appears to have been the main reason this reading fell short of expectations, but overall the results confirmed a soft start to 2011 growth which predictably led to a rally in US fixed income and widespread USD weakness. In turn we have seen USDCHF collapse to new all time lows of 0.8533 and EURCHF hit a record low of 1.2166. This latest move will only compound problems for the SNB, who have already been vocal in their disapproval at prevailing CHF strength. Currency appreciation acts as a form of monetary tightening, and with CPI in Switzerland falling precipitously close to deflationary levels, more monetary tightening is really not what policy makers need. At the last reading Swiss CPI dropped to 0.3% MoM in April, toying alarmingly close levels at which the SNB may feel compelled to act – but how they will act or whether any potential action will succeed is altogether more uncertain. Most market participants will remember that the last time the SNB were forced to intervene in the currency markets, it was a rather costly and ultimately unsuccessful pursuit. Clearly interventionist rhetoric alone has not managed to curb CHF strength at all, and with interest rates already at ultra low levels, there are not many obvious tools at the SNB’s disposal. In the end, this looks like a battle that the SNB cannot win, and certainly cannot afford to fight forever. The combination of ongoing turmoil in Greece, weak growth in the US and Japan facing another lost decade leaves currency traders few better safe havens than the Swiss franc, and therefore we anticipate that this trend will continue through year-end. Across the English Channel, BoE members have continued to pepper the market with diverse opinions on the future of UK monetary policy. MPC Member Adam Posen is featured in today’s Financial Times emphasizing his calls for further quantitative easing, and underlining that the majority on the committee was “right to have held its nerve against calls for rate hikes”. In contrast to this stance however, BoE Deputy Governor Tucker struck a much more balanced tone that hinted he might be on the fence between staying on hold and hiking. Thus far, he has been part of the majority voting for unchanged monetary policy at past meetings, but yesterday stated that policymakers remain worried on inflation. The quote that caught the most attention was his admission that his own policy decisions have been “finely balanced” since 2010. Clearly, the markets are viewing Tucker’s revelations as the more significant, as GBPUSD has now pushed to fresh highs of 1.6460, and fixed income markets have started to price in a slightly higher probability of a near term hike.
09:30 CHF KoF leading indicator May; exp: 2.22, prev: 2.29
12:00 USD PCE price index, % y/y Apr; exp: 2.2, prev: 1.8
13:55 USD U. Michigan consumer sentiment index May-f; exp: 72.4, prev: 72.4
14:00 USD Pending home sales, % m/m Apr; exp: -1.0, prev: 5.1
The Risk Today: EurUsd The dollar has been hit hard over the last couple of sessions, allowing EURUSD to sweep up to highs of 1.4279, where it could now pose a credible challenge on the upper edge of the 2-week downtrend channel. That upper edge of the downtrend currently comes in around 1.4270-75 levels, so on a break above there we would expect a quick trip to 1.4346 (20 May high). Subsequent resistance comes in at 1.4441 (9 May high), 1.4500 psychological resistance, 1.4588 (6 May rebound high) and 1.4764 (former support last seen in early May). On the downside, yesterday’s 1.4068 is the first level of demand, followed by a thick layer of supports around the 1.4000 level which should act as a floor going forward. This zone of support includes Wednesday’s low 1.4015, the 100-day moving average at 1.4007, the 1.4000 psychological support itself, the 17-18 Mar lows around 1.3980, and finally 1.3970 (Monday’s low).
GbpUsd GBPUSD’s rally continues to impress, with the pair seemingly smashing through every resistance level that stood in its path, on its way to hitting a high of 1.6461. Given the rapidity of the move higher, there are bound to be plenty of buyers on dips keen to take advantage of any retracements, so we expect the pair to remain supported going forward into next week. Next targets above for the bulls are eyed at 1.6517 (11 May high), 1.6574 (4 May high), and 1.6746 (28 Apr high). Nearest supports are noted at 1.6380 (former resistance now turned support), 1.6274 (yesterday’s low), 1.6133 (25 May low), 1.6060 (24 May low), and 1.6000 (psychological support).
UsdJpy Despite spending the last 3-weeks in an uptrend channel, USDJPY looked extremely sluggish for much of this week, and yesterday the supports finally gave way – causing the pair to plunge below 81.00. Next supports of note stand at 80.16 (10 May low), 79.57 (5 May low), 78.26 (17 Mar low), and the all-time low 76.40. Given the recent moves in USDCHF and EURCHF to record lows, it does not seem too far-fetched at this stage to suppose the same may be on the cards for USDJPY. Those that were caught long on the break lower are likely to keep the pair capped at 81.45 (overnight highs), and 81.85 (back side of the former uptrend). Further levels remain untouched at 82.24 (19 May high) and 82.64 (200-day moving average).
UsdChf Complete collapse in USDCHF supports yesterday has not only ensured the completion of our head and shoulders pattern (entry: 0.8800, target: 0.8660), but also an impressive sell-off to new all-time lows of 0.8533. This 0.8533 record replaces the previous 0.8554 figure set on 4 May, and leaves us with very little in the way of support on the downside except for weak psychological levels like 0.8500, 0.8400 etc. Although it’s not obvious where next support might step in, the one thing that is clear is that trying to catch the falling knife with long positions is absolutely off the agenda for us. On the topside, resistance comes into play now at 0.8734 (yesterday’s high), 0.8814 (Wednesday’s high), 0.8893 (24 May high), and 0.8941 (16 May high).
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