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Euro Leads as SNB's Negative Rate Talk Sinks Franc; USD Up Before Bernanke

Euro Leads as SNB's Negative Rate Talk Sinks Franc; USD Up Before Bernanke

Christopher Vecchio, CFA, Senior Strategist


The past several hours have produced increased volatility across the board, though the clear winner today – simply because of a lack of data on the calendar and no commentary from key policymakers – is the Euro. Notably, the EURCHF hit Sf1.2600 for the first time since May 2011 after Swiss National Bank President Thomas Jordan said to reporters this morning that the SNB has not yet ruled out negative interest rates, and would not shy away from raising the EURCHF floor in the event of continued Franc strength (which has provoked low inflation over the past few years).

While the USDCHF has rebound back towards the significant Sf 0.9750 level (resistance in May), further gains are in question today as Federal Reserve Chairman Ben Bernanke is set to testify in front of a congressional committee today at 10:00 EST/14:00 GMT. Although the stream of chatter out of the Fed has been quite neutral recently, most market participants are looking ahead down the road towards a day when the Fed is no longer easing at the torrid pace of $85B/month.

In all likelihood, Chairman Bernanke sticks to the script today, the one that NY Fed President William Dudley was out touting this morning in an interview with Bloomberg News (he said that he and Bernanke were “in sync” on policy). That is: ‘the economy is improving, but isn’t great yet; the labor market is steadily moving upwards, but isn’t where it should be for us to withdraw stimulus; disinflation is setting in, but stronger consumption persists; and the payroll tax and ensuing budget sequestration have created quite the fiscal drag.’ These are the same talking points from the Fed’s May meeting, whose Minutes will be released today at 14:00 EST/18:00 GMT.

Taking a look at European credit, slightly higher peripheral yields have had little negative impact on the Euro, which has seemingly been driven by exogenous forces – what the Fed and the SNB plan on implementing. The Italian 2-year note yield has increased to 1.271% (+0.9-bps) while the Spanish 2-year note yield has increased to 1.698% (+5.0-bps). Likewise, the Italian 10-year note yield has decreased to 3.914% (-3.1-bps) while the Spanish 10-year note yield has increased to 4.180% (+1.5-bps); higher yields imply lower prices.


EUR: +0.22%

CAD: -0.38%

GBP: -0.38%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.27% (+0.52%past 5-days)


Euro_Leads_as_SNBs_Negative_Rate_Talk_Sinks_Franc_USD_Up_Before_Bernanke_body_Picture_1.png, Euro Leads as SNB's Negative Rate Talk Sinks Franc; USD Up Before Bernanke

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Euro_Leads_as_SNBs_Negative_Rate_Talk_Sinks_Franc_USD_Up_Before_Bernanke_body_x0000_i1028.png, Euro Leads as SNB's Negative Rate Talk Sinks Franc; USD Up Before Bernanke

EURUSD: The EURUSD has continued to tick higher, as expected, with price basing below the important $1.2875/80 level. I maintain that “now that price has closed below the late-April swing low at 1.2950/60, there’s significant evidence in place to suggest that a test of the 2013 lows may be around the corner, with sellers eying 1.2740/50 to the downside.” My bearish bias would be negated on a weekly close >1.3000/30 (May 14 swing high and 200-SMA).I prefer selling rallies into 1.2975/3000.

Euro_Leads_as_SNBs_Negative_Rate_Talk_Sinks_Franc_USD_Up_Before_Bernanke_body_x0000_i1029.png, Euro Leads as SNB's Negative Rate Talk Sinks Franc; USD Up Before Bernanke

USDJPY: Yesterday I said that “pressure is back upwards ahead of the BoJ Rate Decision and Fed events on Wednesday.” Certainly, the USDJPY is testing the highs again, trading just short of ¥103.00. While gains may be stifled momentarily by 103.25/50, it is possible that a blowout leads to a great move towards the mid-106.00s. As for support, that “comes in at 102.20, while there have been a notable amount of bids as the USDJPY has traded into the 101.80s. Should this bottom floor break, a deeper pullback towards 101.10/40 and 100.30 will be eyed.”

Euro_Leads_as_SNBs_Negative_Rate_Talk_Sinks_Franc_USD_Up_Before_Bernanke_body_x0000_i1030.png, Euro Leads as SNB's Negative Rate Talk Sinks Franc; USD Up Before Bernanke

GBPUSD: Yesterday I said: “An Inside Day capped by the 8-EMA suggests that yesterday was merely a pause in the downtrend rather than a reversal. Today, the GBPUSD is back pressuring last week’s lows. With price holding below the $1.5200/20 region I was watching last week, a move towards the early-April lows at 1.5035/75 now eyed….with daily RSI support cracked, the plan is to sell rallies.” Spurred by weak UK consumption data, the GBPUSD has now sliced through 1.5100 and is well on its way towards the psychologically significant 1.5000 level. Big picture: the GBPUSD may have initiated a Bear Flag that eyes a sell-off into 1.4200, in conjunction with the Double Top off of 1.6300 that has similar implications.”

Euro_Leads_as_SNBs_Negative_Rate_Talk_Sinks_Franc_USD_Up_Before_Bernanke_body_x0000_i1031.png, Euro Leads as SNB's Negative Rate Talk Sinks Franc; USD Up Before Bernanke

AUDUSD: No change: “The AUDUSD closed below the key 0.9860 level last week, ascending channel support off of the October 2011 and June 2012 lows, as well as the weekly 200-DMA. That is to suggest that a top in the pair back to the July 2011 high at 1.1079 is in place, though I’d prefer for a monthly close below 0.9860/900 for better confirmation. Now, a deeper pullback towards 0.9580 and 0.9380/400 is beginning. In the very near-term, with the weekly RSI at the lowest level since the height of the global financial crisis in the 4Q’08, the AUDUSD is probably close to a point of near-term exhaustion. Rebounds should be sold.”

Euro_Leads_as_SNBs_Negative_Rate_Talk_Sinks_Franc_USD_Up_Before_Bernanke_body_x0000_i1032.png, Euro Leads as SNB's Negative Rate Talk Sinks Franc; USD Up Before Bernanke

S&P 500: No change as the intraweek Bull Flag broke to the upside and hit top rail resistance at 1665 on Friday: “The headline index remains strong although there is some theoretical resistance coming up (this is unchartered territory, so forecasting price relies heavily on valuations, mathematical relationship, and pattern analysis)…It’s hard to be bearish risk right now, but it is worth noting that the divergence between price and RSI continues, suggesting that few new hands are coming into the market to support price (recent volume figures would agree).” Channel resistance from mid-April comes in at 1670, while support is at 1648 (8-EMA) and 1642 (steep channel support).

Euro_Leads_as_SNBs_Negative_Rate_Talk_Sinks_Franc_USD_Up_Before_Bernanke_body_x0000_i1033.png, Euro Leads as SNB's Negative Rate Talk Sinks Franc; USD Up Before Bernanke

GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.” Price is back under 1400, and if US yields keep firming, a return to the lows at 1321.59 shouldn’t be ruled out.

--- Written by Christopher Vecchio, Currency Analyst

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