Mid-Day Report: Swiss Franc Sharply Lower on SNB Intervention, Dollar Mixed ahead of FOMC

Swiss franc is sold off sharply right ahead of the magical 1.5 level in EUR/CHF again on, possibly, intervention from Swiss National Bank. Officials from SNB and BIS declined to comment. But this is the second time, that EUR/CHF rebounded strongly after failing to get through the 1.5 level. The difference is that this time the rebound is even stronger enough to set it though 1.5234 resistance level, which technically suggests that the choppy consolidation from March's high of 1.5446 is over. But in any case, 1.5 will be solid in near term.

Dollar was mildly higher against Euro, helped by the strong even stronger rebound in USD/CHF but remains soft elsewhere. May durable goods orders surprised on the upside by rising 1.1%, with ex-transport orders rising 1.8%. New home sales will be released later in the US morning and is expected to rise 2.3% to 360k annualized rate in May. Other data released today saw Japanese trade surplus widened to 0.22T in May while corporate services price index dropped -3.0% yoy. Eurozone current account deficit narrowed to -5.9b Euro. UK CBI Distributive trades was unchanged at -17 in Jun.

In contrast to the report from World Bank, the Organization for Economic Cooperation and Development (OECD) raised outlook for the first time in two years on sign of easing recession in US economy. OECD forecasts the world's most industrialized countries to contract -1.4% in 2009, slightly better than prior projection of -4.3% in March. More impressively, growth in 2010 is forecast to be 0.7%, up from a mere 0.1% in prior projections. While OECD Secretary Gurria said economic activity in OCE countries is reaching bottom, the recover will be rather "slow and fragile" for some time.

Focus will now turn to FOMC announcement later today. Here are some important points to pay attention to:

1. Interest rate outlook: While it's widely anticipated that the Fed will announce to keep its policy rate unchanged at 0-0.25%, we also believe the Fed will address speculations on rate hike in late 2009 as the Fed fund futures has pricing in a significant probably on it. Policymakers will emphasize that while there have been signs that recession is coming to an end, the Fed would like make sure recovery is strong enough to eliminate the output gaps and the risk of deflation before any tightening. The Fed will reiterate that the policy rates will be kept at low level for an extended period of time.
2. Economic outlook: A less dovish tone on economic prospect is likely as recent data suggested recession is ending. Initial jobless claims, which have historically peaked at or near the end of recessions, in June have been running significantly lower than the level in March and new orders component of ISM manufacturing has risen above 50, signaling recession is coming to an end soon. In April, the Fed stated ‘the pace of contraction appears to be somewhat slower'. Policymakers may this time reveal expectation for growth over coming months.
3. Asset purchase program: It's unlikely for the Fed to expand its asset purchase program. However, more flexibility may be allowed in terms of compositions of assets. For instance, the Fed may move to buy more Treasury securities instead of mortgage-backed assets.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 1.0579; (P) 1.0730; (R1) 1.0819; More

USD/CHF rebounded strongly from 1.0630 to as high as 1.0906 today. The development, with fall from 1.0954 contained by 1.0590/1.0650 support zone, is consistent with the view that price actions from 1.0985 are merely consolidation to rise from 1.0590 only. Such consolidation might have completed with three waves down to 1.0630 already. Further rise is now is favor and break of 1.0954 /0985 resistance zone will bring resumption of rise from 1.0590 towards 1.1158/1740 key resistance zone next.

In the bigger picture, fall from 1.1963 is treated the third leg of the consolidation that started at 1.2296, which corrects the whole rally from 0.9634. With daily MACD staying well above signal line, such decline is tentatively treated as completed at 1.0590 and hence, stronger rise is in favor to 1.1158/1.1740 resistance zone. Nevertheless, we'd favor that such consolidation is developing into triangle pattern and hence, upside should be limited by 1.1158/1740 initially and bring one more fall before completing the consolidation. However, break of 1.1963 will serve as the first signal that whole rally from 0.9634 is resuming.

On the other hand, note that a break of 1.0590 low will indicate that fall from 1.1963 is still in progress for 1.0366, or even further to 100% projection of 1.2296 to 1.0366 from 1.1963 at 1.0033 before completing the consolidation from 1.2296.

Economic Indicators Update

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