Forex: Swiss Franc Rally Threaten By SNB, Euro Weakness Ahead

The Swiss National Bank announced it will step up its efforts to stem the ‘massive overvaluation' in the franc, but the flight to safety may impede on the renewed efforts as market participants continue to look for an alternative to the reserve currency.

Talking Points

• Swiss Franc: SNB Prepares To Intervene
• British Pound: BoE Sees Scope To Expand QE
• Euro: Rebound To Be Short-Lived, Outlook Remains Bearish
• U.S. Dollar: Recoups Losses, Budget Statement On Tap

The Swiss National Bank announced it will step up its efforts to stem the ‘massive overvaluation' in the franc, but the flight to safety may impede on the renewed efforts as market participants continue to look for an alternative to the reserve currency. As the SNB prepares to ‘significantly increase the supply of liquidity to the Swiss franc money market,' the pledge certainly sparked a sharp decline in the low-yielding currency, but the market reaction could be short-lived as the swissie continues to benefit from safe-haven flows. As the shift away from risk-taking behavior gathers pace, we may see the franc appreciate further in the days ahead, and the low-yielding currency is likely to face increased volatility as the central bank looks to intervene in the currency market.

Dovish comments from the Bank of England pushed the British Pound to a low of 1.6182 and the sterling may face additional headwinds over the near-term as the central bank shows an increased willingness to expand monetary policy further. After lowering its growth forecast for the U.K., BoE Governor Mervyn King said that the central bank has the tools to act on the U.K. economy, and went onto say that expanding the asset purchase program beyond the GBP 200B remains on the table as policy makers continue to see a risk of undershooting the 2% target for inflation. Although the central bank head argued that the benchmark interest rate will have to rise ‘at some point,' it seems as though the MPC will preserve its wait-and-see approach throughout the remainder of the year and the GBP/USD may consolidate heading into the end of the week as the BoE minutes are on tap in the following week.

The Euro extended the overnight decline to reach a fresh daily low of 1.4219, and the single-currency is likely to weaken further as the heightening risk for contagion continues to bear down on market sentiment. In response, France said it will step up its efforts to meet its debt-reduction goals and announced it make a final decision on its 2012 budget no later than August 24, which is expected to come a month earlier than usual. The measures may help to calm market fears surrounding the euro-area, but the fundamental outlook for the region remains fairly bleak as the EU struggles to contain the sovereign debt crisis. In turn, the group may look at expanding the scope of the European Financial Stability Facility, while the central bank may show an increased willingness to carry its unconventional measures well into 2012 in an effort to support the economy. As the EUR/USD continues to trade with a bearish pattern, the recent rebound in the exchange rate is likely to be short-lived, and we should see the pair push lower throughout the remainder of the week as risk appetite tapers off.

The U.S. dollar regained its footing following the shift in investor confidence, and the reserve currency may continue to recoup the losses following the FOMC interest rate decision should market sentiment deteriorate further. As the economic docket remains fairly light for Wednesday, risk trends are likely to dictate price action throughout the North American trade, but the budget statement due out later today could dampen demands for the greenback as the U.S. government struggles to address the ballooning budget deficit.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	14:00	10:00	Wholesale Inventories (JUN)	1.0%	1.8%
USD	14:30	10:30	DOE U.S. Crude Oil Inventories (AUG 5)		950K
USD	14:30	10:30	DOE U.S. Gasoline Inventories (AUG 5)		1701K
USD	14:30	10:30	DOE U.S. Distillate Inventory (AUG 5)		409K
USD	18:00	14:00	Monthly Budget Statement (JUL)	-$140.0B	-$43.1B

Currency	GMT	Release	Expected	Actual	Comments
JPY	23:50	Housing Loans (YoY) (2Q)	--	2.4%	Slows for fourth month.
JPY	23:50	Tertiary Industry Index (MoM) (JUN)	1.0%	1.9%	Rises for third month.
JPY	23:50	Domestic Corporate Goods Price Index (MoM) (JUL)	0.0%	0.2%	Fastest pace of growth since October 2008.
JPY	23:50	Domestic Corporate Goods Price Index (YoY) (JUL)	2.6%	2.9%
AUD	0:30	Westpac Consumer Confidence (AUG)	--	-3.5%	Lowest since May 2009.
AUD	0:30	Westpac Consumer Confidence Index (AUG)	--	89.6
CNY	2:00	Trade Balance (USD) (JUL)	$27.40B	$31.48B	Biggest surplus since January 2009.
CNY	2:00	Exports (YoY) (JUL)	17.0%	20.4%
CNY	2:00	Imports (YoY) (JUL)	22.0%	22.9%
EUR	6:00	German Consumer Price Index (MoM) (JUL F)	0.4%	0.4%	Fastest pace of growth since April.
EUR	6:00	German Consumer Price Index (YoY) (JUL F)	2.4%	2.4%
EUR	6:00	German CPI - EU Harmonised (MoM) (JUL F)	0.5%	0.5%
EUR	6:00	German CPI - EU Harmonised (YoY) (JUL F)	2.6%	2.6%
EUR	6:45	French Current Account (euros) (JUN)	--	-3.4B	Lowest deficit since October 2010.
EUR	6:45	French Industrial Production (MoM) (JUN)	-0.7%	-1.6%	Declines for third time this year.
EUR	6:45	French Industrial Production (YoY) (JUN)	3.9%	2.3%
EUR	6:45	French Manufacturing Production (MoM) (JUN)	-0.1%	-1.9%	Largest drop since January 2009.
EUR	6:45	French Manufacturing Production (YoY) (JUN)	6.8%	3.3%
USD	11:00	MBA Mortgage Applications (AUG 5)	--	21.7%	Rises for the second straight week.