SNB's sight deposits added +3.81B franc, or +0.71%, to 539B franc, in the week ended February 8. This marks the biggest increase since November when the central bank intervened in the aftermath of Donald Trump's victory. The move this time was, again, to curb the strength of the franc with EURUSD breaking below the support level of 1.0676/84 in late January. There are several reasons that have triggered the recent EURCHF selloff: intensifying political risks associated with upcoming elections in the Eurozone, rising of Swiss bonds yields alongside German ones, and concerns over US' accusation of currency manipulation. We retain our forecast that EURCHF would weaken further. While SNB's intervention would continue, the central bank is likely more tolerable over modest franc appreciation given better domestic economic developments

Eurozone Political Risks:

As the market awaits the first round of the French presidential election, scheduled on April 23, rising popularity of the far-right candidate Marine Le Pen, leader of the Front National Party, has raised concerns over Frexit, a French departure from the EU. The market had also begun talking about Nexit (the Netherlands leaving EU) and Grexit (Greece leaving EU) as Dutch election is coming next month while Greece is once again on the verge of financial crisis. Heighted political risks can be exemplified in the widening in European sovereign spreads since end of January. The chart below shows that German-French 10-year yield spread has widened to the highest level since 2013 on February 6. Despite the pullback since then, the spread has remained elevated. Meanwhile, French bond yields have risen to the levels very close to those of Ireland.

Swiss Yields Moving Higher

SNB has been maintaining the sight deposit rate unchanged at -0.75%, and the target for the three-month Libor at between -1.25% and -0.25%, for some time. Yet, we notice that Swiss yields have actually bottomed out in mid-2016. The chart below shows that Swiss 10-year bond yield have been tracking its German counterpart. The positive correction has increased since Trump's victory in November. Rising Swiss bond yields might be a reason why franc's upside is not much dampened by SNB's negative rate policy.

Currency Manipulator?

US President Donald Trump's preference for a weak USD has raised expectations that his administration would strengthen accusations over currency manipulation: the tactic of weakening a country's currency so as to increase competitiveness of the country at the expense of others. According to the US Treasury Department, the three criteria for a country to be considered a currency manipulator include 1) an economy has a trade surplus with the US above US$20B, 2) an economy has a current account surplus amounting to more than 3% of its GDP and 3) an economy that repeatedly depreciates its currency by buying foreign assets equivalent to 2%. Switzerland has been in US' watch list for some time. Although the country runs trade surplus of less than US$20B with the US, the trend is on the rise. Meanwhile, Switzerland has a current account surplus of around 10% of GDP and it spends as much as 9% of its annual GDP on currency intervention. Speculations that the US would eventually criticize Switzerland on the issue have driven the franc higher.

Event Calendar

Mar 15 Wed Dutch election
Mar 17-18 G20 Finance Ministers meeting
Mar 26 Sun Germany Saarland state elections
Mar 31 Current deadline to trigger Article 50
Apr 23 French presidential election (first round)
Apr 28 German FDP Federal party conference
May 07 French presidential election (second round)
May 07 German Schleswig-Holstein state elections
May 11-13 Finance Ministers meeting
May 12 German North Rhine-Westphalia state elections
May 26-27 G7 Summit Sicily
Jul 07-08 G20 summit Hamburg
Sep 24 German Federal Election

Long bearish candle that was left on yesterday's extension of pullback after strong upside rejection at 114.94, heavily weighs on near-term action.

Yesterday's close below Tenkan-sen line at 113.26 was a bearish signal, with the pair eyeing next pivot at 112.85 (Fibo 61.8% of 111.57/114.94 upleg.

Firm break here is needed to confirm reversal and trigger further weakness from lower top at 114.94.

Corrective upticks should be ideally capped at 113.80 zone (falling 30SMA/Fibo 38.2% of 114.94/113.07 downleg).

Only sustained bounce above 114.00 barrier would sideline downside risk.

Res: 113.26, 113.59, 113.80, 114.22
Sup: 113.07, 112.85, 112.37, 112.00

Long bearish candle that was left on yesterday's extension of pullback after strong upside rejection at 114.94, heavily weighs on near-term action.

Yesterday's close below Tenkan-sen line at 113.26 was a bearish signal, with the pair eyeing next pivot at 112.85 (Fibo 61.8% of 111.57/114.94 upleg.

Firm break here is needed to confirm reversal and trigger further weakness from lower top at 114.94.

Corrective upticks should be ideally capped at 113.80 zone (falling 30SMA/Fibo 38.2% of 114.94/113.07 downleg).

Only sustained bounce above 114.00 barrier would sideline downside risk.

Res: 113.26, 113.59, 113.80, 114.22
Sup: 113.07, 112.85, 112.37, 112.00

Near-term price action is moving in triangular consolidation under yesterday's high at 1.2521 where rally was capped by 20SMA.

The pair remains overall bullish, following false break into daily cloud and subsequent quick recovery.

Consolidation is expected to hold above broken Tenkan-sen line at 1.2463 (also near yesterday's low at 1.2452) to keep near-term bulls intact for renewed attempts above 1.2500 barrier and possible attack at 1.2550 pivot.

Otherwise, expect increasing downside risk on loss of Tenkan-sen support that could accelerate lower for attack at pivotal support zone between 1.2422 (55SMA) and 1.2411/04 (100SMA / daily cloud top).

Res: 1.2508, 1.2521, 1.2550, 1.2580
Sup: 1.2477, 1.2453, 1.2452, 1.2422

Near-term action is biased higher following yesterday's strong rally that marked the biggest one-day gains since 31 Jan.

Rally was so far capped by daily Kijun-sen at 1.0675, with corrective easing under way.

Broken Tenkan-sen now acts as initial support at 1.0634, ahead of 1.0617 (Fibo 38.2% of two-day 1.0520/1.0675 rally / 5SMA) and 1.0600 (55SMA, former strong barrier) where extended dips should find solid support).

Early downside rejection would prompt attack at next key barriers at 1.0695/1.0710 (20SMA / Fibo 61.8% of 1.0827/1.0520) with sustained break higher to signal an end of corrective phase from 1.0827.

Conversely, loss of 1.0600 handle would signal lower top at 1.0675 and turn near-term focus lower.

Res: 1.0675, 1.0695, 1.0710, 1.0755
Sup: 1.0634, 1.0617, 1.0600, 1.0580

Sunrise Market Commentary

• Rates: Short term cautiousness is warranted for bond bears
  Trumps' administrations' policy errors and failed test of technical resistance in US yield terms might balance the bearish bond sentiment, especially if the scandal explodes further. Cautiousness is therefore warranted. Ahead of the weekend, core bonds might be preferred. The eco calendar is empty.
• Currencies: Dollar extends correction, but losses remain modest
  Yesterday, the dollar extended Wednesday's correction as the reflation trade slowed. However, no important technical levels are broken. A big USD repositioning is unlikely before the announcement of the Trump fiscal plan. Sterling traders will keep an eye at the UK retail sales. For now, sterling is confined to tight ranges against the euro and the dollar.

The Sunrise Headlines

• US stock recovered from early weakness despite stronger eco data and ended flat. Overnight, most Asian stock markets lose ground (-0.5%) in a rather dull session with China underperforming (-1%).
• In late US and early Asian trading, the offshore renminbi briefly traded weaker than its onshore counterpart against the dollar in what would have been a reversion to type, as well as a signal that weakening was back on the agenda.
• EMU FM's will miss next week's deadline for an agreement with the IMF to release €7B in aid to Greece, forcing the bailout fight into the Dutch and French election season where diplomats fear it could become highly politicised.
• President Trump dismissed a growing controversy about ties between his aides and Russia as a ruse and scam perpetrated by a hostile news media, and denied any of his associates had contacts with Moscow before last year's election.
• The Justice Department told an appeals court that President Trump would soon rescind and replace his executive order on visas and refugees, adding the court had no further reason to consider the current version.
• President Erdogan has made abundantly clear how he sees a referendum to change Turkey's constitution and create a stronger presidency - those who vote "no", he says, are siding with supporters of terrorism and a failed coup.
• Norway's government has proposed big changes to the world's largest sovereign wealth fund, increasing its risk by investing about $90B more in stock markets and cutting the amount of oil money it can use in the budget.
• Today's eco calendar only contain UK retail sales

Currencies: Dollar Extends Correction, But Losses Remain Modest

US dollar softens as reflation trade slows

On Thursday, a mild risk-off correction captured global markets. US eco data (housing starts and permits, jobless claims and in particular the Philly Fed outlook) printed again strong to very strong. However, the data couldn't reverse the cautious risk-off sentiment in Europe (and to a lesser extent in the US). Core bond yields and the dollar drifted lower. EUR/USD closed the session at 1.0674 (1.0601 on Wednesday). USD/JPY finished the session at 113.24 (from 114.16).

Overnight, Asian equities are mostly ceding further ground as they join the pause in the reflation trade. The decline of the dollar this time doesn't help regional equities. Even so, the correction remains modest. The decline of the dollar and of the US bond yield even stalls this morning; USD/JPY is changing hands in the 113.40 area (ST correction low 113.09 late yesterday). EUR/USD hovers in the 1.0670 area.

Today, there are only second tier eco data. So, technical considerations and global sentiment on risk will dominate USD trading. Regarding risk sentiment, the reflation trade slowed on Wednesday and on Thursday even as US data were strong/very strong. At the same time several Fed members including Fed's chairwoman Yellen indicated that the Fed is close to meeting its targets, opening the way for a rate hike in the coming months. Markets maybe slightly reduced bets on the reflation trade as they fear political uncertainty in Washington. That said, we don't expect investors to go outright short equities just days before US president Trump is expected to announce its fiscal stimulus plan. The picture might change when markets adapt positions once the details of the plan are known. In the meantime, the correction of equities and of the dollar, if any, should remain limited. So, for today, we expected relatively calm technical trading. The correction of the dollar might slow as markets are counting down to the Trump tax plan.

Global context: The dollar was in a corrective downtrend since the start of January as the Trump reflation trade slowed down. Last week, the dollar showed tentative signs of a bottoming out process, supported by the ‘Trump tax promise'. Underlying euro weakness due to political uncertainty in the area is a factor too. As we see the 1.0874 as solid resistance, a sell EUR/USD on upticks approach remains favoured. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains key support. Post-Yellen, the downside of the dollar is better protected. Even so, we are still more cautious on the upside potential of USD/JPY compared to USD/EUR.

EUR/USD: dollar extends correction despite strong US eco data

EUR/GBP

EUR/GBP drifting cautiously higher

On Thursday, there was little UK specific news to guide sterling trading. Cable profited slightly from the broader correction of the dollar, but failed to sustain above the 1.25 barrier. The EUR/GBP cross rate gradually found a better bid throughout the session. The EUR/USD short-squeeze and the cautious risk sentiment propelled EUR/GBP. The pair closed the session at 0.8547 (from 0.8507). Cable finished the session at 1.2489. In a broader perspective, both cross rates are locked in tight ranges.

Today, UK retail sales might inspire sterling trading. Sales are expected to have rebounded in January after an unexpectedly sharp setback in December. Headline sales are expected at 1.0% M/M and 3.4% Y/Y. Given the sharp decline in December, a positive surprise is likely. Of late, UK activity data remained fairly strong. At the same time price data were soft. A modest positive surprise of the retail sales might be slightly supportive for sterling in a daily perspective. However, the focus is more on the price data. So, we don't expect today's data to change the broader picture for sterling trading, unless there is a really big deviation from consensus. EUR/GBP recently hovered in a tight range north of the 0.8450 support, but a break didn't occur. Sentiment on sterling is a rather neutral. Euro weakness in case of rising political uncertainty is a risk for all euro cross rates, including for EUR/GBP. Longer term, we have a sterling negative view as the negative impact from Brexit still has to impact the UK economy. However, this is no issue at this stage. For now, the test of the 0.8540 support is apparently rejected, but the upside momentum isn't really convincing either

EUR/GBP: new test of the 0.8450 support is avoided, but picture remains fragile

Download entire Sunrise Market Commentary

Daily Pivots: (S1) 140.94; (P) 141.70; (R1) 142.15; More...

Intraday bias in GBP/JPY remains neutral for the moment. At this point, rise from 136.44 is seen as the second leg of the consolidation pattern from 148.42. Above 142.79 will target 144.77 first. Break of 144.77 will target a test on this 148.42 high. On the downside, below 140.67 minor support will turn bias back to the downside and extend the fall fro 144.77 through 138.53.

In the bigger picture, price actions from 122.36 medium term bottom are still seen as a corrective pattern. Main focus is on 38.2% retracement of 195.86 to 122.36 at 150.42. Rejection from there will turn the cross into medium term sideway pattern with a test on 122.36 low next. Though, sustained break of 150.42 will extend the rebound towards 61.8% retracement at 167.78.

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Daily Pivots: (S1) 120.65; (P) 120.90; (R1) 121.13; More...

Intraday bias in EUR/JPY remains neutral for the moment. We're holding on to the view that corrective fall from 124.08 has completed at 119.32 already. Above 121.32 will turn bias to the upside for 123.30 resistance. Break of 123.30 will likely extend the whole medium term rise from 109.20 through 124.08 high. Below 119.32 will bring another fall. In that case, downside should be contained by 118.45 cluster support (38.2% retracement of 109.20 to 124.08 at 118.39) and bring rebound.

In the bigger picture, price actions from 109.20 medium term bottom are seen as part of a medium term corrective pattern from 149.76. There is prospect of another rise towards 126.09 key resistance level before completion. But even in that case, we'd expect strong resistance between 126.09 and 141.04 to limit upside, at least on first attempt. Nonetheless, decisive break of 118.45 cluster support (38.2% retracement of 109.20 to 124.08 at 118.39) will argue that rise from 109.20 is completed and turn outlook bearish for 61.8% retracement at 114.88 and below.

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Daily Pivots: (S1) 1.3770; (P) 1.3825; (R1) 1.3923; More...

A temporary low is in place at 1.3722 in EUR/AUD and intraday bias is turned neutral first. Whole pattern from 1.6587 high is seen as corrective. Hence we'd expect strong support from 1.3671 key level to bring reversal. Break of 1.4025 support turned resistance should indicate bottoming. In that case, intraday bias would be turned back to the upside for 1.4289 resistance next.

In the bigger picture, price actions from 1.6587 medium term top are viewed as a corrective pattern. Deeper fall could be seen but, we'd expect strong support above 1.3671 to contain downside and bring rebound. Up trend from 1.1602 should not be finished and will resume later. Break of 1.4721 resistance will indicate completion of such correction and outlook bullish for retesting 1.6587 high. However, sustained break of 1.3671 will invalidate our bullish view and would turn focus back to 1.1602 long term bottom.

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Daily Pivots: (S1) 0.8504; (P) 0.8528; (R1) 0.8570; More...

Intraday bias in EUR/GBP remains neutral for the moment. Near term outlook stays cautiously bearish as long as 0.8643 resistance holds. Fall from 0.8851 is seen as the third leg of the corrective pattern from 0.9304. Below 0.8455 will turn bias to the downside for 0.8303 low next. Break will extend the fall from 0.9304 to 0.8116 key cluster support level.

In the bigger picture, price actions from 0.9304 are viewed as a medium term corrective pattern. Deeper fall cannot be ruled out yet. But we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside. Overall, the corrective pattern would take some time to complete before long term up trend resumes at a later stage. Break of 0.9304 will pave the way to 0.9799 (2008 high).

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