Yen holds ground amid intervention risk

However, we do think the SNB will likely counteract future CHF appreciation through further liquidity measures – driving rates lower in efforts to push market participants away from CHF paper & assets. Therefore, we believe a 1% tax on CHF deposits which essentially sends rates negative may be the most probable and effective policy tool to be implemented when and if needed. This may also be combined with unilateral or possibly even coordinated intervention dependent on the pace of CHF appreciation upon necessary policy reactions.

Near term CHF downside may continue as the SNB’s dedication to combatting excessive domestic currency appreciation has clearly been communicated and markets appear to have heard the message. Further boosts to SNB induced CHF weakness may stem from a continuation of the current risk rally which has lifted US stocks higher by more than +5% on average and 10yr yields on Spanish and Italian government debt back below the 5% level. In fact, it seems the most effective measure to counteracting CHF strength would be further abatement of EZ sovereign debt concerns.

The technical picture provides some evidence that upside in risk assets may extend a bit further. A number of bullish weekly hammer formations are evident across a myriad of securities - the S&P 500 and AUD/USD to name a few. EUR/CHF and USD/CHF have also completed their own respective hammer formations suggesting continued CHF weakness in the week ahead. Potential topside targets in EUR/CHF may be seen into the daily Tenkan line around 1.1200 ahead of the psychologically and technically significant 1.1500 figure. In USD/CHF, further Swissy weakness may see the pair extend gains towards the daily Kijun line around the 0.7800 figure ahead of more meaningful resistance into the key 0.8000 figure.

Taking a look at intermarket analysis

With markets being as volatile as they’ve been over the last two weeks, intermarket analysis has never been more important. For those of you unaware of what we’re referring to, intermarket analysis is the study of several markets at once such as stocks, bonds, commodities and currencies rather than each one in isolation. Thus, it may help trader’s pinpoint market reversals or confirm the trend earlier based upon their respective price movements. With that said, below we have highlighted a few of these markets to keep an eye on in the current trading environment. Should the technical levels in the noted markets below get breached (higher or lower), then be on alert for a similar type movement in many of the high beta currencies – AUD, NZD, CAD as well as the perceived safe havens – CHF, JPY and even the USD.

S&P500: After testing the key psychological level and 38.2% retracement at 1100 earlier in the week, equities have since recovered and look poised to test the daily Tenkan line around 1194. Furthermore, the S&P has formed a weekly hammer pattern which signifies a potential reversal may be in order. Currently, it is faced with immediate resistance between 1195 and 1215 (38.2% retracement of the 1347-1101 decline and August 5th high), with significant resistance at 1250/60 (March & June 2011 lows and 61.8% retracement). Meanwhile, downside momentum could pick up upon a break back below 1170/60. Ultimately, should 1100 give way there’s very little in the way of technical support until the June 2010 at 1010 which is just ahead of the key 1000 level.

10-year yield: Earlier this week it tested the All-time low around 2.03% and has since stabilized around 2.25%. While the All-time low holds we see immediate resistance between 2.40/50% with significant resistance near 2.80/90% (critical support level in June & July and 50-day sma convergence). Meanwhile, should we see a break below 2% it would likely lead to massive risk aversion flows and strong demand for bonds. Under such a scenario we would envision a test of the 1.70/60% area initially.

Gold: After breaking above the prior high around $1683 on Sunday night the yellow metal began to soar and came within a whisker of $1815 (new All-time high). However, in response to this massive appreciation, the CME responded by raising margin requirements 22% mid-week and has since backed off rather dramatically (was down by nearly $90 from the high at one point today). At this juncture we believe a slow drift lower towards $1680/90 (38.2% retracement of the move higher in July & August and last weeks’ high) sounds reasonable before fresh longs decide to jump back on board. Conversely, if it just bottomed around $1725/20 we would wait until a break back above $1770/75 for confirmation before seeking a re-test of the $1815 highs.

Oil (WTI): Appears to be faltering into $88 which sees the daily Kijun line and 50% retracement of the move lower since July 26th. Additionally, it is currently trading within a short-term rising wedge and hourly RSI has already broken below its corresponding support. Thus, we may see renewed selling pressure early next week back towards the $76 low. Should this not be the case, oil sees initial resistance around $90 (June lows) with staunch resistance above near $94/95 – Where the 50 & 200-day sma’s converge and daily Ichimoku cloud base resides.

Key data and events to watch next week

United States: Monday – Aug. Empire Manufacturing, Jun. Net TIC Flows, Aug NAHB Housing Market Index, Fed’s Lockhart Speaks Tuesday – Jul. Import Price Index, Housing Starts, Building Permits, Industrial Production, Capacity Utilization Wednesday – Jul. PPI Thursday – Jul. CPI, Weekly Jobless Claims, Jul. Leading Indicators, Existing Home Sales, Aug. Philadelphia Fed, Fed’s Dudley Speaks Friday – Fed’s Dudley and Pianalto Speak

Euro-zone: Tuesday – German 2Q Prelim GDP, EZ 2Q Advance GDP, Jun. EZ Trade Balance Wednesday – Jun. EZ Current Account, Jul. EZ CPI, Merkel to Discuss Debt Crisis with Sarkozy Thursday – Jun. EZ Construction Output Friday – Jul. German PPI

United Kingdom: Monday – Aug. Rightmove House Prices Tuesday – July CPI, RPI Wednesday – Bank of England Minutes, July Jobless Claims Change, Claimant Count Rate, Jun. Avg Weekly Earnings, Jun. ILO Unemployment Rate Thursday – Jul. Retail Sales Friday – Jul. Public Sector Net Borrowing

Japan: Monday – 2Q Prelim GDP Figures Tuesday – Jul. Tokyo Condo Sales Wednesday – Jul. Trade Balance Thursday – Jun. Coincident & Leading Index, Jul. Tokyo & Nationwide Dept. Store Sales Friday – Jun. All Industry Activity Index

Canada: Tuesday – Jun. Manufacturing Sales Wednesday – Jun. Int’l Securities Transactions Thursday – Jul. Leading Indicators, Jun Wholesale Sales Friday – Jul. CPI

Australia & New Zealand: Monday – NZ July Performance Services Index Tuesday – RBA’s Board August Minutes Wednesday – AU Jun. Westpac Leading Index, AU Jul. 2Q Wage Cost Index, NZ 2Q PPI Thursday – AU May Avg Weekly Wages Friday – NZ July Credit Card Spending, NZ July Net Migration

China: Tuesday – Conference Board China June Leading Economic Index Friday – MNI Aug. Flash Business Sentiment Survey

Brian Dolan is chief currency strategist at

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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