ISM Shores Up Sentiment, Could Japan Intervene?

With the market still reeling over the enormous moves in CHF, a key indicator on the US service sector showed unexpected strength. The CHF fell at least 8.5% against all the majors, NZD was the second-worst performer; USD and CAD led the market. With one safe haven currency now on the sidelines, the market is now mulling JPY intervention. Latest Premium trades are now up, with latest USDJPY longs close to hitting today's target.

The SNB continue to throw strong words at the market after putting a floor of 1.20 under EUR/CHF, saying its looking for a substantial and sustained decline. There was a frenzy of trading in EUR/CHF slightly above 1.20. The pair edged as low as 1.2010 in late European trading but it has since drifted to 1.2075. Were not sure the floor will hold over the long term but were extremely confident that the SNB will defend the 1.20 area in the short term and see EUR/CHF longs as an easy trade at these levels.

Overall sentiment looked to be taking a dive on European worries and the FHFA lawsuits but an upbeat ISM non-manufacturing report improved the mood. The index rose to 53.3 compared to the 51.0 expected and 52.7 prior. The S&P 500 opened down 30 points at 1142 but shortly after the ISM data stocks began to pare losses and the index closed down 0.7% at 1165.

The euro was a major mover as it CLOSED BELOW 1.40 AND BELOW THE 200-DMA. The declines inflicted significant technical damage but the trendline from the 2009 low has so far halted the fall. Italy is debating its austerity budget and German courts will render a decision on Eurobonds on Wednesday. The results will spark a rebound or breakdown in EUR.

The intervention in CHF has sparked talk that a round of currency devaluations, or even that a currency war may be near. If so, its believed the next domino to fall will be Japan. The Ministry of Finance, not the Bank of Japan, dictate FX intervention so todays BOJ meeting is not the event risk that some claim. The move higher in USD/JPY on Tuesday is due to this misplaced speculation and is likely to be unwound unless the BOJ take some other major policy initiative (unlikely). We dont expect an immediate move on JPY. Even if they have been inspired to act, it will take time.

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Nothing has changed since yesterday's RBA decision so chances are the talk will not be market moving. One exception is talk about AUD valuation. The market will now be overly sensitive to hints at intervention. If anything, Stevens will exploit that sensitivity to talk down AUD.