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EUR/CHF Slides on ECB Rates and German Data

The CHF was out in front of the EUR this morning as weak German unemployment data overshadowed positive retail sales numbers. At the same time market participants have begun to shift their expectations for ECB interest rate hikes.

German retail sales numbers for July were unchanged though better than market forecasts for a decline of -1.5%. However, the report was overshadowed by the disappointing German unemployment change. The euro zone unemployment rate also unexpectedly ticked up to 10% from 9.9%. Euro zone CPI was in-line with consensus forecasts of 2.5% y/y. The combination of a slowdown in economic activity in the euro zone (German Q2 GDP rose by 0.1% while French GDP was flat) and Monday’s comments by Trichet have market players adjusting their ECB interest rate expectations which has weighed on the EUR. According to Credit Suisse market expectations are for 15 bp of cuts within the next 12-months as opposed to 25 bp of rate hikes.

The passage of the EFSF by the German cabinet did little to support the EUR. A vote will be sent to parliament to approve the right of the EFSF to buy bonds in the secondary market as well as the primary market, but only on the contingency to recognize cost efficiencies. The EFSF must be approved by all nations in the EMU for the EFSF to have legitimacy and herein lies the difficulty to get all in agreement.

The EUR/CHF fell as low as 1.1630 after earlier in the week failing to make a push above the 1.20 level. Traders should recall it was at this level that the SNB was rumored to be contemplating a peg to the EUR to help counter CHF strength so a failure to close above this level is significant. Yesterday’s doji candlestick also adds to the bearish picture. Support is found at the August 17th high of 1.1550 near the 55-day moving average. Resistance is located at this week’s high near the 100-day moving average at 1.20. Traders should also be eyeing the 200-day moving average which has served as resistance in the past.

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By Russell Glaser

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.