Forex - Swiss KoF Goes Negative

Forex News and Events: USD selling continued for the majority of yesterday’s session. EM & commodity currencies have been a primary recipient to inflows. USDTRY sank to 1.7862, while USDRUB gapped lower at the open and proceed to fall to 30.1811. The impetus seems to be the residual effect of the FOMC meeting where Mr. Bernanke announced it would be nearly 3 years before hikes (he also indicated that selling of balance sheet assets would not happen before 2015). In addition, committed to an explicit inflation target for the first time, suggesting that should inflation start dropping QE would be right around the corner. Clearly the lure of USD rates grounded at zero for almost an eternity has traders trying to pick off carry. That said, there has been little development on the European situation and we suspect that we are seeing the calm before the storm. Italy 10yr BTP yields briefly fell below 6.0% for the first time since Oct 2011. There are rumors of the ECB buying italy in 5 and 7 year paper. The Wall Street Journal reported that private sector creditors were now willing to accept a coupon below 4.0%, however the exact source seems shaky. The story looks to have been sourced from local Greek newspaper Ethno, which stated that the IIF "will submit a new improved offer with an average interest rate of 3.75%". But in these heady days that goes as a reliable quote. But in our mind, the ECB resistance to any discussion on haircuts set a strange precedent and undermines investor’s confidence. Another Swiss KoF leading economic indicators print and another warning of sharp economic deterioration. But this time the read was in negative territory dropping to -0.17 vs. -0.10 exp (0.01 prior read), a clear psychological blow to those holding out hope of a reversal. The first read in negative territory since 2009 deepens a declining trend started Mid-2010. While the pace of decline might have eased the press release accurately assesses that GDP grow is likely to contract yoy. Worryingly the “Construction” module a historical strong segment of the economy is now basing on zero. Clearly the Europe situation is further taking its toll as “Export Destination EU” fell deeper in negative territory. There is no doubt that the reaction from government officials and trade groups’ leaders will be public demand for aggressive and immediate action in the form of a repeg. And we do expected verbal intervention from the SNB, but we question how effective this might be. The muted reaction in EURCHF (only 20 pips spike) suggests that traders are becoming less worried about intervention. Deflationary pressures are building in Switzerland but the problems in Europe have not faded. Any shifting in the floor right now would lead to direct confirmation with market forces. A thankless position the SNB does not want to find themselves in. Just a quick comment, regarding news that the Swiss Federal Council had commissioned a task force to examine the supervision practice within the SNB. There has been speculation that this decision is a power play to politicize or remove a level of autonomy from the central bank. We are not going to quickly discount this theory. We had been slightly naïve to the political force which forced Hildebrand's resignation and will not make the same mistake again. We would like to hear more details on the breadth and scope of this task force. We can’t say that historically the government has been constrained with their criticism of the SNBs FX policy. Despite speculation on SNB intern chairman Jordon’s commitment to the “floor”, we don’t expect a shift in exchange rate policy or credibility issues. Earlier in the week, SNB Board Member Danthine showed no change in stance, reiterating that the central bank is ready to buy 'unlimited' foreign currencies. We have no doubt that the SNB will defend the first few attempts at the “floor” with this extreme aggressiveness, we have witnessed in the past. However, it might now even be the SNB but nervous traders that force EURCHF higher sub 1.2100. Given this historical perspective, we would be buyers anywhere below 1.2100. We see scaling into the EURCHF trade for small upside gains a decent trade.

Today's Key Issues (time in GMT): 08:00 CHF KoF leading indicator Jan 08:30 SEK Retail Sales, % Dec 09:00 EUR M3, % Dec 13:30 USD Preliminary GDP, % Q4 13:30 USD Preliminary consumer spending 13:30 USD Preliminary GDP price index, 14:55 USD Michigan consumer sentiment

The Risk Today: EurUsd Technical’s remain bullish despite dark clouds on the fundamental side. The pair easily cut through 1.3078 resistance, to 1.3134, and exposing further upside. On the topside, resistance stands 1.3120 (intraday high), 1.3237 (13th Dec high) than 1.3456 (8th Dec high). Initial support stands at 1.3078 (26th Jan low), 1.2931 (25th Jan low), 1.2839 (19th Jan Low), 1.2588 (24th Aug low) then a lot of noise till 1.2154 (29th June low). GbpUsd The GBPUSD as able to break above 1.5692 resistance in Asia session. Resistance should kick-in at 1.5780 (30th Nov high), 1.5805 (21st Nov high), then 1.5880 (61.8% Fibo retracement). Minor support located at 1.5663 (intraday low), 1.5517/34 (23rd & 25th Jan low), 1.5416 (19th Jan low), 1.5235 (13th Jan low. UsdJpy The pair finally broke out of it boring January 76.60 and 77.34 range running to 78.09 but momentum has since faltered. Next resistance can be seen at 78.29 (30th Nov high), 79.53 (31st Oct intervention high), 80.24 (prior intervention high) then 81.48 (8th July high). Initial weak support will come into play around 77.01 (24th Jan low), 76.60 (4th Jan low), 76.11 (22nd Sept high), then 75.35 (31st Oct low). UsdChf The pair quickly dropped to 0.9200 cutting though a regions littered with minor supports. Next support is located at 0.9147 (100d MA), 0.9043 (30th Nov 11 low), 0.8953 (11th Nov 11 low). Next resistance is located at 0.9290 (bearish trend ceiling), 0.9396 (23rd Jan high), 0.9596 (9th Jan high), 0.9782 (11 Jan high) then 0.9842 (10th Dec high), then 0.9951 (61.8 Fibo retracement).

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3456 1.5880 80.24 0.9596 1.3237 1.5805 79.53 0.9394 1.3120 1.5780 78.29 0.9290 1.3113 1.5703 77.10 0.9205 1.3078 1.5663 76.60 0.9147 1.2931 1.5517 76.11 0.9043 1.2839 1.5416 75.35 0.8953 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot