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Euro Open: Swiss National Bank Takes the Spotlight

Thursday, 18 September 2008 06:11:59 GMT  |  Ilya Spivak, Currency Analyst

The Euro continued to grind higher in overnight trading, coming within a hair of the 1.44 level. The Pound pulled back a bit as it consolidated daytime gains but regained its hold on the 1.82 mark late into the session. Japan’s service demand surprised to the upside as the Tertiary Industry Index more than doubled expectations in July. The Swiss National Bank takes center stage in European hours as it prepares to announce monetary policy for the first time in 3 months.

Key Overnight Developments

• Japanese Service Demand Tops Expectations in July
• Commodities Gain On Outflow from Stock Markets, Oil Testing $97/barrel


Critical Levels



The Euro continued to grind higher in overnight trading, coming within a hair of 1.44. DailyFX Senior Currency Strategist Jamie Saettele expects a rise to surpass the 1.50 level before the broader downtrend resumes. Support is now at 1.4207, with resistance at 1.4447. Sterling pulled back a bit as it consolidated daytime gains but regained its hold on the 1.82 mark late into the session.


Asia Session Highlights



Japan’s service demand surprised to the upside as the Tertiary Industry Index rose 1.2% in July versus expectations of 0.5% increase. The service sector makes up 60% of the economy, and a sustained rebound here would surely bode well for the ailing island nation that saw annualized growth shrink for two consecutive quarters this year. By definition, this puts Japan into recession. For the moment, the uptick looks to have been driven by hotter weather in July as higher temperatures increased sales of air conditioning and water. Indeed, rising demand for utilities (electricity, water) led contributions among other subsectors of the service metric.


Euro Session: What to Expect



The August edition of Switzerland’s Trade Balance is due for release, with expectations calling for the surplus to contract to 1.03 billion francs from 2.37 billion in July. Leading indicators are conflicting: traders could see a boost to imports from buoyant consumer demand, supporting forecasts. Indeed, Retail Sales nearly tripled expectations earlier this week to grow 6.2% versus forecasts of just 2.3%, reflecting strength in the labor market. That said, the outlook for demand is far from certain as Consumer Confidence sank to the lowest level since 2004 in the three months to August. Further, growth in Producer and Import Prices slowed -0.5% in August, surpassing expectations of a -0.2% decline. This reflects the falling price of crude oil and will put downward pressure on the total import bill. On the export side of things, acute slowdown in the European Union will keep a lid on overseas demand for Swiss products. Indeed, the mountain nation sends 60% of its outbound shipments to the regional bloc. Generally speaking, deterioration in the Trade Balance puts downward pressure on a county’s currency as it belies a greater outflow than inflow of money into the economy.

A better reading on the trajectory of the Swiss economy will come from the Swiss National Bank as the monetary authority will announce policy for the first time in 3 months. Expectations call for benchmark borrowing costs to remain at 2.75%, while trading in index swaps forecasts rates will be effectively unchanged in the next 12 months. Traders will pay particular attention to the press release accompanying the announcement, looking to gauge the degree to which policymakers expect the economy to be affected by the global slowdown.

The UK data set is more straight-forward: Retail Sales are expected to contract -0.4% in August to bring the annualized growth rate to 1.6% from 2.1% in July, the slowest in 2 years. The deep slump in the housing market has severely damaged household wealth and depressed spending growth. Indeed, both the Rightmove and Nationwide house price indices slowed move than 25% in August. A bit of positive stimulus will come from slightly higher equity prices and cheaper crude oil, but this is unlikely to boost receipts in a meaningful way.


Related Articles:

Forex Technicals: The Day Ahead, September 18
US Dollar, DJIA Dive As AIG Intervention Fails To Calm Markets (Forex Video)



To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.

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