Seeking Alpha
Long/short equity, contrarian, currencies, hedge fund analyst
Profile| Send Message|
( followers)  

In this series of articles, we cover economic and political events expected to happen during the week ahead, which have the potential to make a significant impact on major foreign exchange rates. Some of the events will also affect equities and fixed income markets. Although the latter ones will not be the main focus of the articles, the possible effect on them could sometimes be examined, too.

The articles might also include information on the large positions of the futures traders in the examined currencies or equity indices.

Currency Pairs

The last week was an interesting one for most of the financial markets. The U.S. equities rallied to test the highest levels for the year, the bond yields of Spain and Italy declined and currency pairs like EURUSD and EURCHF experienced significant moves.

EUR/CHF

The Swiss franc was formerly used as a safe haven currency, but since April 2012, its exchange rate against the euro has been stuck around the peg level of 1.20 with a little room to move. The peg essentially presents a nice opportunity for a low risk trade with a high profit potential.

The current depreciation of the CHF against the euro, which started on Wednesday, was fueled by rumors in the markets that the Swiss National Bank may raise the cap to the 1.22 level, as pointed out in this Bloomberg article. During the week various economic data on the Swiss economy were released which gave the impression that it could be slowing. The Q2 2012 GDP showed only a 0.5% increase over the Q2 of 2011. This marks a deceleration when compared to the Q1 2012 value of 1.5% and is worse than the consensus estimate of 1.6%. The Swiss inflation for August 2012 measured by the Consumer price index was at -0.5% (year-over-year basis). All those could have brought the rumors to life but the SNB officials declined to comment. The Swiss national bank foreign exchange reserves data, released on Friday, showed a possible change in the risk perspectives of the market could be under way. Those showed an increase of only about 10B from July to August compared to the almost 43B rise in July to June. A probable reason for this could be a weaker need in the market participants to invest in the CHF as a shelter against a possible euro disruption - a need Mr. Draghi addressed directly several times in his speeches. If such a change in the risk attitude proves to be true, the pressure on the SNB to shift the cap on the franc might lessen. This would also mean that the far from the peg level the rate goes, the more it should be susceptible to normal market forces and exhibit common characteristics like increased volatility and a higher downside risk.

Unfortunately, there is no ETF tracking the value of the franc against the euro. But given the idea that the upward movement in the EURCHF pair could be mainly due to money flows toward the euro, including from currency pairs like the EURUSD, one could gain exposure by using the CurrencyShares Euro Currency Trust (NYSEARCA:FXE). This ETF measures the relative value between the U.S. dollar and the euro. The fund is euro denominated and has an expense ratio of .40%.

Besides a direct investment in the FOREX market, the other option could be a long position in the CurrencyShares Swiss Franc Trust (NYSEARCA:FXF) which tracks the value of the franc against the U.S. dollar. The fund holds Swiss francs and has an expense ratio of .40%. The idea behind such a strategy has more to do with an expected depreciation of the USD against major currencies than with an expected increase of the CHF and is driven by the risk trade-off between both currencies.

EUR/USD

After starting the week relatively calmly the euro gradually increased in value against the U.S. dollar until Thursday. It then appreciated significantly on Friday surpassing some main resistance levels and finished a bit above 1.28. This marks an increase of 1.8% for the week. As this Bloomberg article states, the unsatisfactory U.S. payroll data released on Friday (96K against an estimate of 141K and a previous value of 125K) weighed on the USD which resulted in a 180 pips euro price increase for the day.

The speech of Mr. Draghi on Thursday revealed the ECB plan to buy bonds on the secondary market in order to ease the pressure on the yields of the troubled EU countries. The other important decision on behalf of the ECB was to leave the interest rate unchanged at 0.75%. This supports the euro in long term while the bond buying plan takes care of the short term market fears.

A further short term drop of the euro both against the USD and CHF is not to be completely rejected as it seems it moved too fast for a too short time but the appreciation during the last week was a significant one which could lay a solid foundation for a further growth.

The Week Ahead

During the current week the most interesting economic events concern inflation data on both sides of the ocean and central banks decisions on economic policy, all of which are concentrated in the second half of the week starting from Wednesday. Both the SNB and the FED should make their decisions on the interest rates on Thursday. Both of them could announce significant changes in their current policy, too.

A possible appreciation of the euro could be played by a long position in the CurrencyShares Euro Currency Trust as explained above. If one expects the euro to depreciate against the U.S. dollar, a short position in the same ETF could be used.

Another option is to open respective positions in the DB USD Index Bullish (NYSEARCA:UUP) ETF or in the DB USD Index Bearish (NYSEARCA:UDN) fund. Both track the value of the USD against a basket of six other currencies and have an expense ratio of 0.50%.

Important economic data releases on Monday:

  • EMU Sentix Investor Confidence (SEP) - 8:30 GMT / 3:30am EST

  • US Consumer Credit Change - 19:00 GMT / 2:00pm EST

The first day of the week presents a little amount of economic events and the euro price should be susceptible more to trading emotions from the previous week. The EURUSD rate could suffer a bit due mostly to profit taking.

The consensus estimate for the Sentix investor confidence index is that it would fall to -30.3 from a previous value of -29.6. Given the events during the last week a positive surprise here could not be ruled out. If it appears this would be supportive to the euro.

A value of the U.S. consumer credit change above the estimate of $6.46B or even above the previous reading of $9.05B could send the USD higher as it would mean the consumers could afford larger expenses and fuel the U.S. growth.

Update as of 09:00 GMT on Monday: The Sentix index did report a positive surprise with a value of -23.3. On the news the euro advanced above the 1.28 level but currently it trades again near the 1.2780 level.

Important economic data releases on Tuesday:

  • Germany Wholesale Price Index (Aug) - 6:00 GMT / 1:00am EST

  • USA NFIB Small Business Optimism Index (Aug) - 11:30 GMT / 6:30am EST

  • USA Trade Balance (Jul) - 12:30 GMT / 7:30am EST

The consensus estimates for the wholesale price index in Germany show the markets expect that there will be no change on a monthly basis (0.3%) and a slight slowdown on the year-over-year basis (2.0% against the previous reading of 2.2%). Any positive surprise here would support the euro as it would mean there could be an increase in consumption.

Concerning the U.S. small business index the consensus is for a slight decrease to a value of 91.2 compared to the previous one of 91.3. Any positive surprise here could support the USD.

The same is true for the reading on the U.S. trade balance where the markets expect the trade deficit to contract with about 2.45% to $42.92B. Any negative surprise on this could send the euro higher against the U.S. dollar.

Important economic data releases on Wednesday:

  • Germany Harmonized Index of Consumer Prices (Y-o-Y and M-o-M) (Aug) - 6:00 GMT / 1:00am EST

  • EU Consumer Price Index France, Spain (Aug) - 5:30 - 7:00 GMT / 0:30 - 2:00am EST

  • EMU Industrial Production (Jul) - 9:00 GMT / 4:00am EST

  • USA MBA Mortgage Applications (Sep 7) - 11:00 GMT / 6:00am EST

  • USA Import Price Index (Aug) - 12:30 GMT / 7:30am EST

  • USA Wholesale Inventories (Jul) - 14:00 GMT / 9:00am EST

  • USA FOMC Meeting Start - N/A

  • Germany - Preliminary Ruling of the Constitutional Court on the ESM and the Fiscal Union - N/A

A lot of inflation data in Europe. Those values are important because of the effect the country inflation could have on the overall EU inflation. For the CPI on a monthly basis the market expects increases in France (0.5%) and in Germany (0.3%) but while the France's estimate is higher than the previous reading of -0.5%, the Germany's one is lower than the previous data (0.4%). Any surprises here showing a higher-than-expected inflation could support the euro.

The markets expect the industrial production in the EMU to be stalled on a monthly basis so any surprise here could drive the value of the euro in the direction of the surprise.

The previous reading of the U.S. mortgage applications showed a decline (-2.5%). A better value now could support the U.S. dollar as it would mean one of the driving force behind the U.S. economy is improving.

The consensus estimate for the U.S. import price index is that it will rise with 1.2% on a monthly basis from a previous decline of -0.6%. This could be supportive for the dollar but the previous reading on an yearly basis is -3.2% so it seems the index have a long way to go before returning strongly to a positive territory and having the chance to pose inflationary fears in front of the FED.

The consensus estimate for the wholesales data is for an increase (0.3%), compared to a decline a month ago (-0.2%). A higher value would suggest further slowdown of the economy which would weight on the USD as it also increases the chances for a further monetary easing on behalf of the FED.

While the data examined above is in the normal course of events there are two other decisions that have the potential to have a significant impact on currencies. Those are the FOMC meeting and the ruling of the German constitutional court.

The decisions of the FOMC are expected to be released on Thursday as the meeting takes two days but the court ruling should be announced on Wednesday. Given the court does not rule in favor of the ESM and the fiscal compact, this could weight significantly on the euro leading to its depreciation as it would undermine the ECB efforts to increase the confidence in the single currency. Such a surprise should not be ruled out as the Germany's Bundesbank was the one that did not agree with the ECB bond buying plan.

Important economic data releases on Thursday:

  • Switzerland Producer and Import Prices (Aug) - 7:15 GMT / 2:15am EST

  • Switzerland SNB Interest Rate Decision (Sep 13) - 7:30 GMT / 2:30am EST

  • ECB Monthly Report - 8:00 GMT / 3:00am EST

  • USA Producer Price Index (Aug) - 12:30 GMT / 7:30am EST

  • USA Jobless claims - 12:30 GMT / 7:30am EST

  • USA FED Interest Rate Decision (Sep 13) - 16:30 GMT / 11:30am EST

  • USA Monthly Budget Statement (Aug) - 18:00 GMT / 1:00pm EST

  • FOMC Statement - 18:15 GMT / 1:15pm EST

Swiss producer and import prices would indicate whether there could be an elevated inflationary pressure inside the country. The markets expect the prices to continue to slide on a monthly basis (-0.2%), although at a slower pace. Any surprisingly big increase of the value would mean higher inflationary expectations could be formed which would put pressure on the SNB to decrease the money supply. This could have a direct impact on the SNB interest rate decision. Any increase of the rate would again make the franc an attractive investment which would put upward pressure on the currency and could bring back the EURCHF exchange rate close to the current peg level of 1.20.

The SNB press release should be closely watched as it could hint directions of the risk attitude of the markets as well as a quantitative change in the bank's policy.

The EUR/USD pair could see an increased volatility in the hours following the FED's rate decision. The U.S. monthly budget statement is important because the possible fiscal cliff the U.S. is facing could be among the main reasons for a change in the USD sentiment. It could also present significant risks in front of the world economy as stated by the IMF Managing Director Christine Lagarde, according to a recent Bloomberg article. All those, including a possible FED announcement of another form of QE, could significantly weight on the USD.

Important economic data releases on Friday:

  • EMU Consumer Price Index (Aug) - 9:00 GMT / 4:00am EST

  • EMU Employment Change (Q2) - 9:00 GMT / 4:00am EST

  • European Council Meeting - N/A

  • USA CPI (Aug) - 12:30 GMT / 7:30am EST

  • USA Retail Sales (Aug) - 12:30 GMT / 7:30am EST

  • USA Reuters/Michigan CSI - 13:55 GMT / 8:55am EST

The markets expect the CPI index in Europe to increase with 0.5% on a monthly basis. Any increase of the yearly CPI beyond the previous value of 2.6% would support the euro.

The EU employment showed a contraction of -0.5% (Y-o-Y) for Q1. A positive surprise here would support the euro.

An unexpected increase of the U.S. CPI (Y-o-Y) beyond the consensus estimate of 1.6% could support the USD.

The U.S. retail sales (M-o-M) are expected to grow slower, with an increase of 0.6% compared to the previous month's reading of 0.8%. A positive surprise here would support the USD. The same is valid for the Reuters/Michigan sentiment index.

The event that could have a more significant and long term impact on the EURUSD rate is the European council meeting. Given the EU officials agree and propose further common measures to deal with the European crisis, this could add to the euro appreciation.

Source: Currencies: The Week Ahead

Additional disclosure: I am long Euro against the Swiss franc.