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Forex: Franc Selloff To Gather Pace, Euro Outlook Remains Bearish

Forex: Franc Selloff To Gather Pace, Euro Outlook Remains Bearish

2011-09-06 13:10:00
David Song, Currency Strategist
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Talking Points

  • Swiss Franc: SNB To Keep EUR/CHF Above 1.2000
  • Euro: Italy Protest, Risk For Credit Rating Downgrade Weigh On Market Sentiment
  • British Pound: BoE to Expand QE As Growth Deteriorates
  • U.S. Dollar: Benefits From Risk Aversion, ISM Non-Manufacturing On Tap

Swiss Franc: SNB To Keep EUR/CHF Above 1.2000

Indeed, the Swiss franc tumbled lower as the central bank pledged to stem the marked appreciation in the local currency, and the low-yielding currency should depreciate further as policy makers aim to balance the risks for the region. As the Swiss National Bank vows to keep the EUR/CHF above 1.2000 with ‘utmost determination,’ the rebound from 1.0067 looks poised to gather pace in the days ahead, and the exchange rate looks as though it will make a run at the 200-Day SMA (1.2408) as price action clears the 100-Day SMA at 1.1941. The major shift in policy is likely to limit the Swiss franc’s reaction to risk, and the low-yielding currency may fail to benefit from safe-haven flows as the SNB puts a floor under the exchange rate.

Euro: Italy Protest, Risk For Credit Rating Downgrade Weigh On Market Sentiment

The Euro pared the overnight advance to 1.4283 and the single-currency may continue to give back the rebound from 1.3836 as European policy makers struggle to contain the sovereign debt crisis. As the general strike in Italy takes center stage, the growing opposition against the EUR 45.5B austerity plan appears to be creating a rift within the government, and the heightening risk for contagion certainly dampens the outlook for the Euro as the region looks poised to face a credit rating downgrade. As the EUR/USD clears the previous month’s low at 1.4055, the recent selloff may gather pace ahead of the European Central Bank interest rate decision due up later this week, and President Jean-Claude Trichet may strike a cautious outlook for the economy as the region copes with a slowing recovery. In turn, the near-term outlook for the euro-dollar remains fairly bearish, but comments from the ECB is likely to heavily influence the single-currency as market participants weigh the outlook for future policy.

British Pound: BoE to Expand QE As Growth Deteriorates

The British Pound extended the decline from earlier this week, with the GBP/USD slipping to a fresh monthly low of 1.6020, and the sterling may continue to retrace the rebound from July (1.5781) as the economic docket reinforces a weakened outlook for the U.K. As private sector activity deteriorates, the Bank of England may see a greater argument to expand monetary policy further, and the Monetary Policy Committee may see scope to increase the asset purchase program beyond the GBP 200B target in an effort to stem the risks for a double-dip recession. In light of the recent comments by the BoE, members of the committee may side with Adam Posen’s call to increase quantitative easing by another GBP 50B, and speculation for additional monetary support is likely to bear down on the sterling as policy makers continue to see a risk of undershooting the 2% target for inflation. As a result, the sharp reversal in the GBP/USD should continue to pan out in the days ahead, and the exchange rate may fall back towards 1.5900 to test for psychological support.

U.S. Dollar: Benefits From Risk Aversion, ISM Non-Manufacturing On Tap

The U.S. dollar rallied across the board on Tuesday and the reserve currency may continue to appreciate during the North American trade as it benefits from safe-haven flows. As the SNB intervenes on the Swiss franc, the USD looks as though it will now be the primary beneficiary from the risk-off environment, and a dismal ISM Non-Manufacturing report could exacerbate the shift in market sentiment as the outlook for future growth deteriorates. As the flight to safety gathers pace, we should see the near-term advance in the USD accelerate, and the greenback may continue to recoup the losses from earlier this year as the uncertainties surrounding the global economy bears down on investor confidence.

Will the EUR/USD Trend Sideways in September? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

USD

14:00

10:00

ISM Non-Manufacutring Composite (AUG)

51.0

52.7

Currency

GMT

Release

Expected

Actual

Comments

GBP

23:01

BRC Sales Like-For-Like (YoY) (AUG)

0.0%

-0.6%

Falls for the fifth time this year.

AUD

1:30

Current Account Balance (Australian Dollar) (2Q)

-7100M

-7419M

Smallest deficit since 3Q 2010.

AUD

1:30

Net Exports of GDP (2Q)

0.1%

-0.5%

Falls for two straight quarters.

AUD

1:30

Home Loans (JUL)

1.5%

1.0%

Rises for the fourth consecutive month.

AUD

1:30

Investment Lending (JUL)

--

1.9%

AUD

1:30

Value of Loans (MoM) (JUL)

--

1.4%

AUD

4:30

Reserve Bank of Australia Interest Rate Decision

4.75%

4.75%

Keeps rate on hold on slower growth.

CHF

7:00

Foreign Currency Reserves (AUG)

--

253.4B

Largest since the series began in 1992

CHF

7:15

Consumer Price Index (MoM) (AUG)

-0.2%

-0.3%

Slowest pace of price growth since November 2010.

CHF

7:15

Consumer Price Index (YoY) (AUG)

0.3%

0.2%

CHF

7:15

CPI - EU Harmonised (MoM) (AUG)

--

-0.6%

CHF

7:15

CPI - EU Harmonised (YoY) (AUG)

--

-0.3%

GBP

8:00

New Car Registrations (YoY) (AUG)

--

7.3%

Rises for first time since June 2010.

EUR

9:00

Euro-Zone GDP s.a. (QoQ) (2Q P)

0.2%

0.2%

Slowest pace of growth since the economic contraction in 2Q 2009.

EUR

9:00

Euro-Zone GDP s.a. (YoY) (2Q P)

1.7%

1.6%

EUR

9:00

Euro-Zone Household Consumption (QoQ) (2Q P)

-0.1%

-0.2%

EUR

9:00

Euro-Zone Gross Fixed Capital (QoQ) (2Q P)

0.8%

0.2%

EUR

9:00

Euro-Zone Government Expenditure (QoQ) (2Q P)

0.1%

-0.2%

EUR

10:00

German Factory Orders s.a. (MoM) (JUL)

-1.5%

-2.8%

First decline since March.

EUR

10:00

German Factory Orders n.s.a. (YoY) (JUL)

9.8%

8.7%

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