SNB Takes Huge Loss, USD/CHF Breaches Support At 0.9491

Forex News and EventsThe statement released by the Fed was slightly more hawkish than expected and allowed the dollar and US Treasury Bills to make a pause in the aggressive sell-off triggered by poor GDP data earlier in the day. The Committee wrote that economic conditions may “warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run”. In other words the Fed will start tightening at a gradual pace and is ready to wait that the US economy is definitely out of the woods, with inflation around 2% and labour market indicators continuing to improve sustainably. It is therefore more likely that the Federal Reserve will start tightening in September than in June as Fed officials don’t want to hurt the economic recovery and expect that “economic activity will expand at a moderate pace”. In addition, inflation is still below the 2% target, while analysts do not expect inflation above 2% before the very last months of 2016 (median forecast).However a rate hike in June cannot be ruled out as Fed officials seem to be slightly optimistic (than expected) that the economic growth and inflation will rebound in the coming months. Therefore the release of April and May data – starting tomorrow with April ISM Manufacturing (exp. 52, prior 51.5) and Michigan Sentiment Index (exp. 96, prior 95.9) – will be decisive in determining the timing of the next rate hike. Initial jobless claims are due today and are expected at 290K (prior 295K).EUR/USD is higher after the release of encouraging data out of Spain. The Spanish economy expanded more than expect at an annual pace of 2.6% verse 2.5%. Unemployment decreased slightly in Germany during the month April, unemployment rate remains unchanged at 6.4%. We are still waiting on the release of more data out of the Eurozone today.BCB fights inflationIn Brazil, the BCB raised the Selic rate by 50bps to 13.75% in an attempt to curb inflation and to restore the markets confidence in the central bank ability to steer the economy. However, there is still a long way to go before bringing inflation to 4.5% target. Moreover, inflation expectations are way above target (5.8% for 2016), so the central should keep raising rates. However, President Tombini needs to be cautious as the Brazilian economy is expected to contract again in Q1 2015 by -0.2%y/y. USD/BRL is stabilizing slightly below 3.00 amid slightly hawkish Fed’s statement.SNB takes a huge loss (by Peter Rosenstreich)If you had any doubt about the Swiss National Bank’s logic to suddenly abandon the EUR/CHF 1.2000 minimum exchange rate, today’s news of a CHF30bn loss should provide clarity. Interim results of the Swiss National Bank as at 31st March 2015, “reports a loss of CHF 30.0 billion for the first quarter of 2015. The loss on foreign currency positions amounted to CHF 29.3 billion. A valuation loss of CHF 1.0 billion was recorded on the gold holdings”. The outstanding question was always how big would the SNB loss be due to the ending of the minimum exchanges rate, and now we have our answer, a whopping “total of CHF 41.1 billion.” Although the overall CHF30bn loss was on the lower side of estimates, it was the worst loss in SNB history (chf19bn). In addition, with the reference rate set at 1.0452 there is still more room for further loses. However, if the SNB had decided to stand in front of the ECB euro induced selling, balance sheet expansion would have been extremely higher and eventual loses more devastating. Clearly, while unpopular to say, the unceremonious removal of the “floor” was the correct strategy. This massive loss will have a lasting sigma on the psyche at the SNB and politically within the cantons, which will hamper policy strategy moving forward. The Swiss cantons will be extremely unhappy with not receive payments this year. With CHF strengthening and sight deposits creeping higher there is no shortage of speculation as to potential SNB action. Given today’s revelations, we remain skeptical of any addition policy measure outside of verbal intervention. Negative rates are having a limited effect with further rate decreases hurting Swiss savers and now we can calculate the financial cost of direct FX intervention. Elsewhere, Swiss KOF leading indicator unexpectedly fell 89.5 from 90.8 in April. With Greek risk increasing, ECB full steam ahead on QE and Swiss economic data stable, EUR/CHF should continue to head towards parity.

Peter Rosenstreich

EUR/USD has breached the resistance at 1.1043 (27/04/2015 high) confirming persistent short-term buying pressures. The break of channel resistance indicates an improving shortterm technical configuration. A key resistance stands at 1.1245 (27/02/2015). Hourly supports can be found at 1.114 (05/03/2015) and 1.1043 (18/03/2015) In the longer term, the symmetrical triangle from 2010-2014 favours further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. A strong resistance stands at 1.1114 (05/03/2015 low). Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support).

GBP/USD has broken to the upside above key resistance 1.5166 (see declining trendline) confirming corrective phase. However, a break of the resistance at 1.5552 (25/02/2015 recovery high) is needed to improve the mid-term technical structure. Another resistance stands at 1.6287. Hourly supports can be found at 1.5166 (18/03/2015) and 1.5028 (24/04/2015 low). In the longer-term, the break of the strong support at 1.4814 opens the way for further medium-term weakness towards the strong support at 1.4231 (20/05/2010 low). A decisive break of the key resistance at 1.5166 (18/03/2015 high) is needed to invalidate this scenario. Another key resistance stands at 1.5552 (26/02/2015 high).

USD/JPY continues to consolidate above its key support at 118.18. A break of the resistance at 120.12 (14/04/2015 high, see also the declining trendline) is needed to suggest exhaustion in the selling pressures. An hourly support stands at 118.53. Another resistance can be found at 120.84 (13/04/2015 high). A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 124.14 (22/06/2007 high) is favoured. A key support can be found at 118.18 (16/02/2015 low), whereas a key resistance stands at 121.85 (see also the long-term declining channel).

USD/CHF has breached the support at 0.9491 and 0.9450 (26/02/2015 low, see also the 200- day moving average) confirms persistent shortterm selling pressures. An initial support lies at 0.9241 (50% fibo level). Hourly resistances can be found at 0.9413 (intraday high) and 0.9493 (27/04/2015 low). In the longer-term, the bullish momentum in USD/CHF has resumed after the decline linked to the removal of the EUR/CHF floor. A test of the strong resistance at 1.0240 is likely. As a result, the current weakness is seen as a countertrend move. Key support can be found 0.9170 (30/01/2015 low).

Resistance and Support

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