EUR/CHF – What Now?

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Market Drivers January 16, 2015

Markets consolidate aimlessly in aftermath of SNB
EZ core CPI slips to 0.7% vs. 0.8% eyed
Nikkei -1.43% Europe -0.06%
Oil $47/bbl
Gold $1259/oz.

Europe and Asia:
CHF Retail Sales -1.2% vs. 1.1%
EUR Final CPI 0.7% vs. 0.8%

North America:
USD CPI 8:30
USD IP 9:15
USD U of M 9:55

Its been an aimless night of consolidation as currency continued to absorb the shock of the SNB decision to simply walk away from its 1.2000 EUR/CHF peg. Volatility has dropped markedly but fallout from the decision is likely to reverberate for a long time as many brokers and dealers attempt to clear the losses on their books as a result of yesterday discontinuous move that turned many customer account negative.

In the meantime the price action in the market was considerably more muted as the majors generally stayed within the ranges carved out yesterday amidst very little fresh newsflow. The only report of note was the EZ CPI data which showed that core CPI continued to contract printing at 0.7% vs. 0.8% eyed. The EUR/USD dropped below the 1.11600 in the aftermath of the report but remained supported underneath that level for now.

With QE now generally priced in, any surprise in the EUR/USD may come from the upside. Unless Mario Draghi announces a 1 Trillion plus QE program at next Thursday’s press conference most of the negative news is already priced into the pair and it may find some support at the 1.1500 level. Nevertheless the fundamental outlook in EZ remains very weak and the currency will still be a sell the rallies trade for the foreseeable future.

As to EUR/CHF – the pair has had such a massive devaluation that a bounce may be due. Although investors flocked to the safety of the franc yesterday we wonder how long they will stay in it given the fact that they will be bleeding at least 75bp of their capital as a result of negative interest rates. Today for the first time ever Swiss 10 year bonds went to negative yield meaning that investors are now willing to lend 10 year money to the Swiss at a loss.

Such a dynamic is not likely to last in the capital markets for long and that is why EUR/CHF is finding a modicum of support above parity in overnight trade. If the ECB offers less than full QE at next week’s meeting than the prospect of bigger bounce in EUR/CHF is quite likely.

In North America today the market will get a look at CPI data and the U or M report. The U o M Consumer confidence numbers are expected to climb to 94.2 from 93.6 the month earlier and given the fact that gasoline prices declined further while employment remained robust, the prospect of strong number is high. However of U of M surprises to the downside USD/JPY could once again dip below 116.00 as trader will begin to question the viability of June timeline for any Fed normalization action.

Boris Schlossberg
Managing Director

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