Traders Watching EURCHF For SNBs Response

The market remains positive on the recent developments in Europe, supporting risk across the board. EURUSD continues to feel heavy falling to 1.3026 from yesterday’s high of 1.3212. In China manufacturing PMI had a strong print coming in at 50.5 vs. 49.6 exp. The fact that the EU summit ended with no real development failed to dampen the growing optimism (only the 16th summit in the two years since the Greek bailout). The close of the meeting was anti-climatic as the main headlines such as the early adoption of the ESM, were already leaked into the market. Several Eurozone officials reiterated that the ESM Treaty will be signed in March and go into effect in July. Even French President Sarkozy’s hardly reassuring comments that the summit ‘went as planned’ ironically seemed truthful to traders this time around. While Papademos told reporters ‘The timeline is tight, but we are absolutely focused on the target of bringing the negotiations to a successful conclusion by the end of the week.’ But there is little hard evidence that anything is really happening on the front lines of the debt swap negotiation. There is speculation that a deal between Private sector bond holders and Greece could happen as early as today however, there is still massive uncertainty in regards to the ECB position (we remain doubtful). In addition, the lasts comments suggest that Greece is now a resisting further austerity measure has hurt expectations that the Trioka would release the second bailout package. In general risk has held steady however, there is a feeling that investors patience in the EUR and Europe is wearing thin. In Europe yesterday, Eurozone data was soft with German retail sales dropping 1.4% mom, putting the yoy number to -0.9%, while the Eurozone unemployment rate increased to 10.4% from 10.3% as expected. German data continued to show signs of strength as unemployment fell by 34k. News flow unexpectedly became very thin mid-day and markets were content to drift. Yesterday, the SNB’s foreign FX reserves declined to CHF 257.5 billion in December, but these numbers are hard to interpret since a large amount of EURCHF FX swaps are maturing or rolled over. Although the stability of the numbers suggests that the central bank it trying to keep the appearance of limited activity. With the EURCHF trading down to 1.2041 there is growing speculation as to where the SNB is hiding, as well as how long they are willing to protect this policy. Today, Swiss Dec yoy retails sales dropped to 0.6% vs. 2.3% exp. and 1.8% prior read. The detailed breakdown showed negative reads across the board and numbers really speaks for itself. The sharp erosion in general resilient Swiss consumers decision to support the economy is concerning. While Swiss January PMI manufacturing 47.3 vs 51.2 cons, 49.1 revised from 50.7 last. Clearly the events in Europe and globally is taken its toll on Swiss economic health. But the real story is in the muted reaction in the EURCHF (say 15 pips). Pre-Hildebrand resignation, negative economic reads of this significance (even lagging indicator) would have speculation of further intervention flowing. Most likely a machine gun round of verbal intervention from the SNB, trade leaders and government officials alike. We would have seen an immediate charge to the upside, as chatter of a repeg at 1.2500 or 1.300 hit the street. But times have changed. There are questions regarding SNB leadership, independence and commitment to the ‘floor’. While a few months ago there was a general conviction that the SNB 1.200 ‘floor’ was hard, these days there are theories of a soft floor. A growing belief that the SNB will allow the EURCHF to drift below 1.200 in order to force unwind of speculative longs and perhaps let resting order do some of the intervention work. This type of chatter doesn’t sound like a central bank acting with ‘utmost determination’. That said, we are clearly in the ‘red zone’ in our current pricing. Given the aggressive interventionist strategy we witnessed in 2009 -10, we don’t believe the SNB will let the markets get close to 1.2000 (true Hildebrand is no longer at the helm). We believe that the SNB ‘floor’ is a hard one and would be looking to build long position in this area

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