Intraday Market Thoughts

A Peg in CHF? Highly Unlikely by Adam Button

by Adam Button
Aug 12, 2011 0:00

The Swiss franc tumbled on the threat of a peg to the euro on Thursday. The risk trade was back on with stocks shooting higher; commodity currencies led while CHF lagged badly. The SNBs sent franc traders into a frenzy when he said a temporary peg to the euro could not be ruled out. Japanese industrial production is coming up Asian trading.

Sentiment jumped on the announcement of short-selling bans in Belgium, France, Italy and Spain that will begin on Friday. US initial jobless claims added to the improved outlook as they fell to a four-month low of 395K from 402K.

The S&P 500 gained 4.6% to close at 1172, in the fourth-consecutive 4% move. That closing level matched the highs from the prior two sessions, leaving the market in a technical stalemate. Gold fell $28 to $1756 after touching a record $1817. Silver outperformed and closed at $38.96.

Given the moves elsewhere, forex was relatively quiet. EUR/USD was virtually unchanged on the day and the majors moved within normal ranges.

The one large exception was CHF as it posted its biggest one-day gain since 1999. The SNB's Jordan sent franc traders into a frenzy when he said a temporary peg to the euro could not be ruled out. There was also speculation of the SNB introducing negative interest rates. Earlier in the month, SNB leader Hildebrand said a fixed and permanent peg isn't compatible with the legal mandate of the central bank.

We see virtually no chance of the SNB attempting a peg unless EUR/CHF falls below parity. The technical, financial and legal challenges of a peg are immense. That doesnt mean the SNB will not use some other method to devalue CHF.

What is more interesting is that it looks possible the CHF may have topped out. Long-term, one-sided moves in markets often end in a similar way with a spike bottom/top. And that's exactly what appears to be playing out on CHF charts.

Other economic news on Thursday was a negative for the North American block. The US trade deficit fell to 53 billion from 50.9 billion and was worse than the $47.5 expected. Canada's trade deficit was also larger than expected at $1.6B vs $0.9B expected. The US had an extraordinarily weak 30-year Treasury auction, selling at 10 basis points higher than the market was expecting.

Asia-Pacific Preview

The lone data point of note on the calendar is Japanese industrial production at 0430 GMT. It is expected up 3.9% m/m in July after an identical rise in June. At the moment, economic news is generally being pushed aside as sentiment, rumours and central bank talk dominates. It would take a miss of more than 1 full percentage point to get the market interested. The bond auction and rising yields might have more of an impact in Asian trading as they help to boost USD/JPY.


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