UBS are out with a client note on EUR/CHF … “SNB: Magic Words Failing”.
UBS’s conclusions (bolding mine):
Price action over the last few days suggests to us that the SNB might have started to purchase EURCHF to defend the 1.20 EURCHF floor. Next Monday’s weekly sight deposit numbers should give the market the first indication whether these suspicions are true and to what extent. We believe any sizeable increase in sight deposits could boost euro assets such as bonds and equities and weigh on euro crosses, due to investors anticipating SNB diversification trades.
The lack of speculative flow suggests to us that the reason for heavy EURCHF trading is structural, and indeed today’s trade numbers showed yet another record high external surplus. We think traders largely feel unable to go long EURCHF at this point because the tail risk of the floor breaking is looming too large. As a result, the cross could become trapped at current levels with the SNB prompted to be active on a daily basis.
Negative deposit rates might be the only way out of the situation as they would give traders renewed incentives to sell Swiss francs. The SNB would probably want to be very cautious and not impose more than 10bp initially but be willing to escalate the measure should it be required. Ultimately we believe the measure should be enough to effectively protect the floor and prevent renewed large scale intervention.
And, one more thing, this from the body of the report … again, bolding mine:
Very few, if any, traders in the market appear to have been willing to take positions against the SNB. On the contrary, speculative flow has largely been supporting the minimum exchange rate. We believe this is because the credibility both of the central bank and of the floor has remained strong. Indeed, the SNB could hardly have been clearer in their recent communication, noting for example in the September quarterly assessment that the economic outlook had ‘deteriorated considerably’ and that the ‘risk of deflation’ had increased. It seems clear that under these circumstances the minimum exchange rate remains critical to the SNB’s monetary policy stance and that it would be defended with ‘utmost determination’.
Traders did a double-take on the huge jump in the Philly Fed and many still don’t believe the huge number. The big story on the day was the inability of the US dollar to rally on good inflation, home sales and the Philly Fed.
The dollar has been hit by profit taking in the past two Fridays and it might have started early. Then again, dollar bulls shouldn’t be discouraged by a single day stall after two months of non-stop gains.
The dollar struggled but little damage was done
Early in Europe, USD/JPY touched 118.98 in a surge of buying but it couldn’t crack the big figure and it began to slid, hitting 118.00 early in US trading. A momentary rally to 118.40 followed CPI but it reversed down to 117.74 — the low of the day. Another rally followed the Philly Fed with the pair hitting 118.30 but again it slid back. The second time it held the low and was on the upswing at the end of the day at 118.12.
On the daily chart, USD/JPY and EUR/JPY (even moreso) are flashing warning signs and potential falling star formations.
EUR/USD was a whippy one, spazing around the 1.2500 to 1.2570 range all day. It’s a bit of a wedge to end the day so a break might be setting up for a good trade. We’ve been hearing lots of talk about cutting shorts (and even some brave longs).
Sterling was strong on upbeat retail sales numbers but after hitting the highs of the week at 1.5737 and hitting some buy stops along the way, it fell back to 1.5697. It was still the first time cable made back-to-back gains since October.
USD/CAD was on the defensive as oil rallied and a good Canadian wholesale sales report sent the pair to 1.1300 from 1.1360.
The Australian dollar bounced to 0.8622 from 0.8566.
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