EURUSD has trended sideways as expected over the past two weeks. Both the upper and lower ends of the range between 1.268 and 1.296 were tested, albeit unsuccessfully. The recent trend has shown that further sustained USD weakness will only arise if the market’s US interest rate expectations shift from “stable” to “rate cuts”.
Upcoming data releases, in particular the Federal Reserve’s minutes and the Institute of Supply Management index, pose a very real threat in terms of volatile interest rate expectations. Signs of a recovery in growth or increased price pressure in the US could lend temporary support to the USD in view of the extreme USD short positions. The resistance levels of 1.268 and 1.258 offer opportunities to increase or take up USD short positions, suggests UBS.
Critical technicals
USDJPY has risen slightly since mid-August. The spot is currently at 116.5, a critical value in technical terms. On a daily basis, the USDJPY downtrend in place since December 2005 is in this range. Daily closing spots above 117 would confirm the recent upward move and make levels close to 118 seem possible. In view of the massive JPY short and USD long positions, the upward correction cannot be expected to go any further than this. From a long-term fundamental viewpoint, however, these levels are not justified. Both cyclical JPY indicators (growth, monetary policy) and structural ones such as the balance of payments, valuation and the end of deflation point to lower USDJPY spots over the long term. We are therefore maintaining our JPY-positive view relative to the USD and our USDJPY short position with a stop-loss at 118.
Franc still attractive
USDCHF has been trading in a range between 1.218 and 1.25 of late. The trend clearly reflects the market’s expectations regarding US interest rates. Some key US data are due out in this connection over the next two weeks. Signs of stronger US growth or persistent inflationary pressure could lead to renewed speculation over a further rate hike by the Federal Reserve, which would lift the USD. We believe the short-term upside potential for USDCHF is limited, however, partly due to the extreme CHF short positions. In addition, the likelihood of the Swiss National Bank taking a more restrictive stance has increased recently.
This is not yet priced in and thus offers upside potential for the CHF. For the time being, therefore, we expect range trading between 1.218 and 1.26. We think any corrections to the upside will be shortlived and view them as CHF buying opportunities.
No threat below 1.586
EURCHF has stabilized around 1.58. Euroland’s positive economic momentum is thus not priced into the spot. The technical situation is unchanged: the uptrend is still intact, and spots above 1.586 would signal a further rise. However, we think this is unlikely and instead confirm our CHF-positive stance. The CHF has not lost its appeal in cyclical or valuation terms. As regards Swiss monetary policy, the situation has even improved in the franc’s favour recently.
Statements by Swiss National Bank (SNB) Chairman Jean-Pierre Roth in particular have made it clear that rates may be hiked more sharply than the market is currently anticipating if the need arises. The SNB’s interest rate decision on 14 September is the next key event in this regard. Only spots below 1.576 (uptrend since April) would herald a turnaround.
