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At 7:45 AM ECB rate announcement (exp n/c, prev 3.25%) At 8:30:00 AM US Jobless Claims (exp 410k, prev 421k) At 10:00:00 AM US March Factory Orders (exp 0%, prev -0.1%)
The Swiss franc spiked lower today following a surprise 50 bp rate cut by the Swiss National Bank to a new 3-month LIBOR target range at 0.75% to 1.75%. The SNB said the recent quick rise in the franc had led to an undesired tightening of monetary conditions. Bank officials were concerned by the sharp rise in Swissy this week as it blew past EUR/CHF support at 1.46 to hit an overnight 6-month high of 1.4486. The euro/franc cross rate has long been a concern of the SNB since the steep 5.5% rise in the value of the franc against the euro after the 9/11 attacks has hurt exporters. The fall in CHF against the dollar is also a concern as the recent uncertainty to revisit the dollar has urged investors to seek out the well-known safe haven of the franc.
Ahead of the decision today was a small cut in the overnight lending rate, which could be seen as a shot across the bow. When speculators did not back off of buying the franc, the SNB cut rates. This surprised the markets, which had begun to think the SNB would not cut rates, given the unexpected rise in inflation. Swiss April consumer prices rose 0.9% on the month and 1.1% on the year, far exceeding expectations. But the SNB said today that the rise was due to special factors and that the prospects for stable prices were still good.
Fair enough, but last Friday SNB president Roth reiterated that any strategy to weaken the Swiss franc would backfire because it would result in a loosening of monetary policy and endanger price stability. "Such a strategy would lead to higher prices and higher interest rates," he said.
Interestingly, USD/CHF rose one franc but EUR/CHF did not make it above the key 1.46 level. It looks like today's intervention in CHF strength was a reminder to the markets that there remains one very good reason that a large fall in the dollar would not be supported. Aside from the ECB who has always maintained that the euro is undervalued against the dollar, officials from the Bank of Japan, Bank of England and Swiss National Bank have all expressed their discomfort with a further appreciation in their currencies. Just as US manufacturers have complained about the strong dollar, these countries have larger manufacturing sectors dependant on exports for a recovery. A stronger currency in this low inflation environment is not what they want.
This is perhaps why we got an across the board rise in the dollar and not much in the way of EUR/CHF strength.
USD/CHF rose from overnight lows of 1.5960 to a session high of 1.6131 but remains well below the key 1.6180 trendline support level and appears weakened by the fall. First sign of a reversal is to overcome 1.6120 and 1.6170/80. Support is seen at 1.6000, 1.5985/75, 1.5800, and 1.5585 all previous lows.
Dollar buying could also be due to the fact that oil prices fell about 1% today as Israel ended a siege of Palestinian leader Arafat's headquarters in Ramallah, easing the fears of more violence and unrest in the Middle East. Brent crude trading at 25.60, down $1 on the week as dealers wonder whether Israel's ending of the siege will encourage Iraq to resume supply to the market.
EUR/USD tested key support at 90.40/35 and a break of that could lead to a test of 89.95 and begin to test the market's conviction that the dollar is done. A move below 89.95 would target 89.60 and would signal a bearish leaning.
However, if EUR/USD maintains above 90.30 (61.8% of 89.95 to 90.85) there is still the possibility of testing overnight 6-month highs of 90.85. But the upside is seen heavy around here and 91.00 cents marks key trendline resistance. A break here would trigger more stop losses but should still be contained by 91.20 (61.8% of 95.59 to 83.50) which is a big retracement level, followed by 91.50 which marks previous support and resistance.
Eurozone manufacturing saw its first collective rise since March 2001, as it climbed to 50.7 in April from 50.0 in March. This met expectations and the euro showed little reaction to the news.
The European Central Bank is expected to keep its lending rate unchanged today at 3.25%. No reaction is expected in the markets if this is the decision.
GBP/USD gave up earlier gains after reaching a new 6-month high of 1.4677, just short of a previous reaction high of 1.4080 reached on November 1, 2001. Given the sharp decline in the dollar over the past weeks, look for a reversal unfolding if sterling were to break below 1.4620 key trendline support/resistance which was broken on Wednesday. A fall below this level would target key support at the 1.4550/60 area. A break of 1.4550 would be a very negative signal for the bull and could lead to a selloff targeting 1.4460 and 1.44.00/1.4390.
According to the National Institute of Economic and Social Research, the influential think-tank, says the government's five economic tests for entry have been met. Britain could join the euro at the current rate 62 pence without significant problems, they say, countering opposing views that the exchange rate is an obstacle to entry. Opponents argue that joining at the current level would lock Britain into an uncompetitive exchange rate and that problems in the UK economy could not be countered by the BoE (b/c interest rates would be set by the ECB). This seemingly takes pressure off sterling, which rose to a day's high of 61.72 on the news.
Meanwhile, the dollar reversed course today as it held above 127.00 and resisted falling back to this years low of 126.32. USD/JPY rose to a day's high of 128.10 which is needed to stem the decline. Now, to end the bear risk USD/JPY need to maintain above 128.00 and get back above the overnight 128.65 high. A break below 127.80 could fuel another selloff towards 127.00 and a fall below that would test 126.32 on its way to 125.00.