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Euro Consolidates as SNB Continues to Push For Weaker Franc

Last updated 11/8/2011 5:16 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Markets await Italian Parliamentary vote
• UK IP/MP bit better than forecast
• Nikkei -1.27% Europe up 1.83%
• Oil at $96/bbl
• Gold at $1792/oz.

Overnight Eco

• AUD Trade Balance (Australian dollar) (SEP) 2.56B vs. 3.02B
• EUR German Trade Balance (euros) (SEP) 15.3B vs. 12.9B
• GBP RICS House Price Balance (OCT) -24 vs. -23
• GBP Industrial Production (MoM) (SEP) 0.0% vs. 0.1%
• GBP Manufacturing Production (MoM) (SEP) 0.2% vs. 0.2%
• GBP NIESR Gross Domestic Product Estimate (OCT) n/a

Event Risk on Tap

• CAD Housing Starts (OCT)

Price Action

• USD/JPY at 78.00
• AUD/USD trades below 1.0350
• GBP/USD spikes to 1.6080 on early Eu buying
• EUR/USD inches towards 1.3800 ahead of Italian vote

Risk appetite improved in early European session dealing today with high beta currencies rising modestly at the start of the day as all eyes remained on Italy where Prime Minister Silvio Berlusconi faces his stiffest political challenge yet ahead of a key Parliamentary vote on the budget. Although this is not a formal no-confidence vote, a failure to pass the legislation could put enormous pressure on Mr. Berlusconi as his support will have greatly eroded.

The latest developments in Rome suggest that Mr. Berlusconi may actually  survive the vote if the center-left opposition parties abstain. However, Mr. Berlusconi’s opponents are preparing a no-confidence motion that could be held within days. As we noted yesterday, “Although a no confidence vote would on the surface only add to the political instability in Italy, the currency markets may actually cheer such an outcome given Mr. Berlusconi’s questionable reputation.  Having suffered an endless string of investigations into his personal and business behavior, Mr. Berlusconi has lost the confidence of most investors to lead Italy at a time of serious economic challenge and his departure from the political stage may be actually viewed favorably by most market participants.” 

Meanwhile the latest economic data produced a rare ray of sunshine for the EUR/USD with German trade balance for September printing markedly better than forecast  at 15.3B versus 12.9B eyed. This was the best reading in a year and offered a glimmer of hope that the country’s vaunted export sector continues to perform well. However, the trade data was relatively dated while the latest readings from the manufacturing sector suggest a severe downturn in demand which bodes badly for future trade growth.

For the second day in a row the Swiss franc remained highly volatile on the crosses on speculation that the Swiss National Bank will raise its floor on the EUR/CHF after yesterdays weak CPI data triggered alarms that the country is sinking into a deflation.  SNB Vice Chairman Thomas Jordan in remarks at a conference in Lucerne noted that, “Even at 1.20 to the euro, the franc remains at a high level which should further weaken.” However Mr. Jordan did not explicitly call for a raising of the floor in EUR/CHF to 1.2500 and as a result the pair traded off its early session highs. Nevertheless, after consolidating for nearly two months within a narrow 1.20-1.22 band, EUR/CHF has broken out to the upside and now threatens to make a run at the key 1.2500 level as Swiss authorities continue to signal that they want to see further franc weakness.    

The US economic calendar remains extremely quiet with only the IBD Economic optimism on the docket today. Trading in North American session is likely to be driven by equity market flows as well as developments in Rome, although as it appears now the Berlusconi saga may have a few more days to run resulting in choppy trade as markets consolidate while awaiting the next catalyst with EUR/USD likely rangebound between 1.3750-.3850 for the day.  

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.