Steen Jakobsen
Emerging markets have been battered by a debt-induced perfect storm, a dizzy US dollar and crumbling commodities prices. But there is hope – and investment opportunities – even though the pretend-and-extend craziness of printing money persists.
Article / 09 January 2012 at 15:03 GMT

EURUSD rangebound ahead of ECB? Also - SNB’s Hildebrand resigns.

Head of FX Strategy / Saxo Bank

EURUSD has seen a steep descent over the last few trading days – is it ready to take a breather back towards resistance ahead of Thursday’s ECB? Also – EURCHF fairly steady after Hildebrand resignation.

SNB’s Hildebrand resigns – EURCHF drops
EURCHF was roiled today as the SNB’s Hildebrand resigned over the currency transactions (CHF selling vs. USD) carried out by his wife three weeks before Hildebrand declared a floor on the EURCHF. While the timing of the trades was unfortunate, I expected Mr. Hildebrand to survive in office because it was clearly not in his self interest to have anything to do with the trade. But alas, a mere three days after he declared he would not resign and after having received a declaration of support from the Swiss government, he resigned anyway. EURCHF initially dropped on the news, suggesting the market is complacently long the pair on expectations that volatility is asymmetric (logic is that SNB will keep the floor, so upside much more open-ended in case SNB declares higher floor). With the SNB momentarily rudderless, the market may anticipate far lower odds of a fresh move to raise the EURCHF floor. And it may increase the odds of a run lower in EURCHF higher simply due to complacency ahead of this news item, though one wonders if there is any gravy beyond 1.20 for contrarians. In a press conference at approximately pixel time, Hildebrand announced that Vice President Thomas Jordan would be leading the SNB until a new President is found.

Merkozy relations cozy
German chancellor Merkel and French President Sarkozy met today and held a brief press conference that was heavy on the solidarity proclamations and light on details. Merkel said that a new pact would be possible by the Jan 30 EU Summit and at the March summit at the latest. She indicated that Germany and France are in very close agreement, that both want Greece to make good on its agreements (particular focus on the private sector involvement in its default) and want Greece to stay in the Euro. On the latter, it  is interesting to see Czech central bank head thinks Greece should exit the Euro unless provided massive backing – see Reuters story.

Merkozy also took the opportunity to declare support for a new financial transaction tax. No surprise that immediately after this proclamation, EURGBP dipped further after having consolidated higher earlier in the day (UK’s Cameron adamant that UK not interested in this tax, potential or capital flows to UK, etc.). All in all, there was little for the Euro to trade on from the press conference. Euro debt spreads were slightly tighter today and the various risk indicators were not particularly alarming. As we discussed in the Week Ahead piece, we are wondering to what degree the Euro (broadly speaking, not just in EURUSD) will begin behaving like a run-of-the-mill carry trade funding currency going forward and correlate negatively with risk appetite.

EURUSD has had a tendency to stabilize for a time after sharp falls like the one of the last few trading days – do we see a couple of days of consolidation early this week ahead of the ECB  meeting on Thursday? The first layer of resistance lies in the area between 1.2830 (weekly pivot) and the resistance from the previous low at 1.2860.  Our three-month target range to the downside regardless of the short-term shenanigans lies in the 1.24 – 1.22 area. The channel is well defined, but is getting rather long in the tooth. 

Odds and ends
An auction of German 6-month bills saw such heavy demand that yields on the debt dropped to -0.01%, the first time that an auction of EU debt has resulted in negative yield.  Is there any firmer indication that the world is looking to park its money in safe assets? It’s remarkable that this comes as the German DAX remains near the high end of its six-month range.

Over the weekend, the St. Louis Fed’s Bullard – the purported mastermind of QE2 – said that a QE3 would likely not be needed, though at least one of the major US investment banks is still looking for US economic conditions to weaken again and for the Fed to need to bring QE3 on line sometime in the first half. We suspect that QE3 lies further off than the more pessimistic observers believe. If that is the case, then it would be very interesting to see the Fed on the move in the middle of a presidential election – especially because if the Fed is on the move, that means that economic conditions would be worsening again.

Looking ahead
Have a look at our Week Ahead report published earlier today for a full account of what to look for this week. As we said in that report, it is “for better or for worse” time for risk with the S&P500 in a pivot zone (1258-1295) and the question we’d like to have answered in the near term in the major currencies is whether the Euro actually starts to outperform a bit in a risk off situation – not as a safe haven bet, but merely as the market potentially unwinds the current, heavy positioning in anti-Euro/pro-risk trades.

Continue to watch the US political stage as New Hampshire heads for the polls tomorrow for the Republican primary. Anything besides a strong Paul performance is mere status quo, while signs of strong Paul momentum is a game changer for the US, the markets, and the world (odds are massively against him taking the Republican nomination, though a strong enough performance could mean a very interesting third-party run, considering his positions already place him effectively outside of the political establishment.

Economic Data Highlights

  • Switzerland Dec. Unemployment Rate rose to 3.1% as expected and vs. 3.0% in Nov.
  • Germany Nov. Trade Balance out at +16.2B vs. +12.0B expected and +11.5B in Oct.
  • Sweden Nov. Service Production out at +0.1% MoM and +2.6% YoY vs. 0.0%/2.3% expected, respectively and vs. +2.8% YoY in Oct.
  • Euro Zone Jan. Sentix Investor Confidence out at -21.1 vs. -24.0 in Dec.
  • Germany Nov. Industrial Production out at -0.6% MoM and +3.6% YoY vs. -0.5%/+3.9% expected, respectively and vs. +4.2% YoY in Oct.
  • Canada Nov. Building Permits out at -3.6% MoM vs. -5.0% expected

Upcoming Economic Calendar Highlights

  • US Fed’s Lockhart to Speak (1740)
  • US Nov. Consumer Credit (2000)
  • New Zealand Building Permits (2145)
  • New Zealand Dec. QV House Prices (2300)
  • UK Dec. BRC Sales Like-for-like (0001)
  • UK Dec. RICS House Price Balance (0001)
  • Australia Nov. Building Approvals (0030)


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