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Franc Gains Before SNB Rate Decision, Euro Data to Boost Debt Fears

Franc Gains Before SNB Rate Decision, Euro Data to Boost Debt Fears

2011-12-15 07:45:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points

  • SNB May Unveil New Measures to Weaken Franc on Deflation Worries
  • Eurozone PMI Data to Dent Economic Outlook, Boost Debt Crisis Fears
  • Aussie, NZ Dollars Underperform on Soft Chinese and Japanese Reports

A packed economic calendar looms ahead in European trading hours, with traders first turning their attention to the Swiss National Bank monetary policy announcement. Year-on-year CPI readings printed in negative territory over the past two months and the government’s State Secretariat for Economic Affairs downgraded its economic growth and inflation projections earlier this week, calling for deflation at an average annual pace of 0.3 percent next year. This opens the door for SNB Chairman Philipp Hildebrand and company to step up efforts to devalue the Franc hoping to counter the slide in prices domestically while stoking overseas demand by making Swiss-made goods relatively cheaper for foreigners. In terms of specific policy options, traders will be on the lookout for an increase in the EURCHF floor (currently at 1.20) or the imposition of negative interest rates on foreigners’ CHF-denominated deposits. The Franc pushed broadly higher ahead of the announcement.

Lingering sovereign turmoil and rapidly deteriorating economic conditions in the Eurozone – Switzerland’s top export market – may add to the urgency of taking steps against further Franc appreciation as safety-seeking capital eyes the currency as an alternative to the single currency. The growth side of the equation is expected to be reinforced by December’s preliminary set of Eurozone PMI figures. Expectations call for German manufacturing to contract at the fastest pace in over 2 years while growth in the service sector slows for a second consecutive month, holding within a hair of negative territory. The composite region-wide PMI gauge is forecast to print below the 50 “boom-bust” threshold for the fourth consecutive month, showing the pace of contraction in the manufacturing and service sectors matched a 28-month high reached in October.

Slumping economic growth threatens to compound the debt crisis even as officials fail to craft a credible response it. Indeed, sluggish performance reduces regional governments’ tax intake, making it that much harder to reduce deficits and stoking already considerable sovereign solvency fears. Furthermore, reducing the GDP component of the debt-to-GDP ratio widely used to gauge a country’s ability to carry its debt load makes existing liabilities appear more difficult to shoulder, denting investors’ confidence further and driving yields even higher. Needless to say, this amounts to a vicious cycle of rising borrowing costs and deepening recession, none of which bodes well for the Euro. With that in mind however, this dynamic is nothing new. Indeed, Eurozone GDP growth expectations (based on a Bloomberg survey of economists) have been steadily sinking since late August. This means today’s data set may be met with a muted response from the markets as investors begin to turn reluctant to express an aggressive directional bias just ahead of the holiday season.

Most of the major currencies were confined to narrow ranges versus the US Dollar in overnight trade. The Aussie and Kiwi Dollars underperformed overnight amid signs of regional slowdown in Asia, denting the outlook for Australian and New Zealand export demand. The HSBC China PMI gauge showed manufacturing in the East Asian giant shrank for the second month while foreign direct investment (FDI) fell for the first time since July 2009. Meanwhile, Japan’s Tankan Survey showed large manufacturers’ sentiment unexpectedly dropped the most in seven months while capital expenditures grew at the slowest pace in a year in the fourth quarter (excluding the three months to March 2011 when the Tohoku quake disrupted activity).

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

21:30

NZD

Business NZ PMI (NOV)

45.7

-

46.5

23:50

JPY

Tankan Large Manufacturers Index (4Q)

-4

-2

2

23:50

JPY

Tankan Non-Manufacturing Index (4Q)

4

1

1

23:50

JPY

Tankan Large Manufacturers Outlook (4Q)

-5

-3

4

23:50

JPY

Tankan Non-Manufacturing Outlook (4Q)

0

1

1

23:50

JPY

Tankan Large All Industry Capex (4Q)

1.4%

2.5%

3.0%

0:00

AUD

Consumer Inflation Expectation (DEC)

2.4%

-

2.5%

0:30

AUD

RBA FX Transaction (A$) (NOV)

330M

-

401M

0:30

AUD

New Motor Vehicle Sales (MoM) (NOV)

-0.7%

-

1.0% (R-)

0:30

AUD

New Motor Vehicle Sales (YoY) (NOV)

2.9%

-

4.3% (R-)

2:00

CNY

Actual FDI (YoY) (NOV)

-9.8%

-

8.8%

2:30

CNY

HSBC Flash Manufacturing PMI (DEC)

49.0

-

47.7

4:00

JPY

Tokyo Condominium Sales (YoY) (NOV)

31.0%

-

-9.0%

6:00

JPY

Machine Tool Orders (YoY) (NOV F)

15.8%

-

26.0%

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

8:00

EUR

French PMI Manufacturing (DEC P)

47.0

47.3

Low

8:00

EUR

French PMI Services (DEC P)

49.0

49.6

Low

8:15

CHF

Industrial Production (YoY) (3Q)

0.0%

2.3%

Low

8:15

CHF

Industrial Production (QoQ) (3Q)

-0.9%

3.6%

Low

8:30

CHF

Swiss National Bank Rate Decision (DEC 15)

0.0%

0.0%

High

8:30

EUR

German PMI Services (DEC A)

50.0

50.3

Medium

8:30

EUR

German PMI Manufacturing (DEC A)

47.5

47.9

Medium

9:00

EUR

ECB Publishes Monthly Report (DEC)

-

-

Medium

9:00

EUR

Italian CPI - EU Harmonized (MoM) (NOV F)

-0.1%

-0.1%

Low

9:00

EUR

Italian CPI - EU Harmonized (YoY) (NOV F)

3.7%

3.7%

Low

9:00

EUR

Italian CPI (NIC incl. tobacco) (MoM) (NOV F)

-0.1%

-0.1%

Low

9:00

EUR

Italian CPI (NIC incl. tobacco) (YoY) (NOV F)

3.3%

3.3%

Low

9:00

EUR

Euro-Zone PMI Composite (DEC A)

46.5

47.0

Medium

9:00

EUR

Euro-Zone PMI Manufacturing (DEC A)

46.0

46.4

Medium

9:00

EUR

Euro-Zone PMI Services (DEC A)

47.0

47.5

Medium

9:30

GBP

BoE/GfK Inflation Next 12 Mths (NOV)

-

4.2%

Low

9:30

GBP

Retail Sales ex Auto Fuel (MoM) (NOV)

-0.4%

0.6%

Medium

9:30

GBP

Retail Sales ex Auto Fuel (YoY) (NOV)

0.3%

0.9%

Medium

9:30

GBP

Retail Sales w/Auto Fuel (MoM) (NOV)

-0.3%

0.6%

Low

9:30

GBP

Retail Sales w/Auto Fuel (YoY) (NOV)

0.4%

0.9%

Low

10:00

EUR

Euro-Zone CPI - Core (YoY) (NOV)

1.6%

1.6%

Medium

10:00

EUR

Euro-Zone CPI (MoM) (NOV)

0.1%

0.3%

Medium

10:00

EUR

Euro-Zone CPI (YoY) (NOV)

3.0%

3.0%

High

10:00

EUR

Euro-Zone Employment (QoQ) (3Q)

-

0.3%

Low

10:00

EUR

Euro-Zone Employment (YoY) (3Q)

-

0.4%

Low

11:00

GBP

CBI Trends Total Orders (DEC)

-20

-19

Low

11:00

GBP

CBI Trends Selling Prices (DEC)

-1

2

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2931

1.3117

GBPUSD

1.5406

1.5529

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

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