Draghi unruffled, CHF up and bothered, NFP next

<p>ECB president Draghi weighs on the euro after stating the duration of the next round of asset purchases. EUR/CHF nears the all-important 1.2000 level and […]</p>

ECB president Draghi weighs on the euro after stating the duration of the next round of asset purchases. EUR/CHF nears the all-important 1.2000 level and US jobs could deliver a 350,000 rise in non-farm payrolls.

As if backed into a corner following rumours of non-consultation with governing council members, ECB president Draghi struck back by reiterating quantitative and time-based forward guidance; highlighting that the ECB balance sheet expansion would reach 2012 levels and introducing a time-based guidance of a two-year period to purchases of ABS and covered bonds. Draghi showed no hesitation in keeping the door open for outright purchases of sovereign bonds, hinting at further downward revisions to growth and inflation at next month’s meeting.

CHF caught between ECB and Swiss gold vote

Swiss franc traders are closely watching the November 30 Swiss referendum on whether the Swiss National Bank should raise gold reserves to hold 20% of its total reserves from the current 7.8%. While the Swiss public favours the inclusion of more gold at the bank, Swiss parliament, as well as the central bank, counter that the yellow metal lacks effectiveness as a monetary policy tool. The SNB prefers to continue selling gold and holding liquid currencies to facilitate its FX interventions — a crucial instrument in staving off excessive franc strength and winning the fight against deflation. This includes the central bank’s commitment to support EUR/CHF above 1.2000, which it has been doing successful since 2011. But this could change.

Although the SNB has won previous referenda in maintaining the status quo over gold holdings, current polls by Swiss broadcaster SRG suggest the ‘Yes’ camp is firmly in the lead. A victory for the ‘Yes’ camp means the SNB will be forced to hold more gold, becoming constrained in limiting CHF appreciation. The immediate implication of a ‘Yes’ is a positive for CHF and gold.

The worst case scenario for the SNB would be a ‘Yes’ vote and renewed euro weakness. Regardless of additional sweeteners Draghi offers in the way of monetary policy next month, euro weakness is an integral part of combatting deflation. With EUR/CHF standing at 1.2040, the closest it had been to 1.2000 in two years, the SNB must find a way. If you trust the SNB to continue saving the 1.2000 line, favouring USD/CHF remains viable. Having broken above its 2012 channel, USD/CHF’s 0.8200 appears intact.

 NFP at 350,000?

We expect tomorrow’s release of October NFP to come in 330,000-340,000, exceeding expectations of 235,000. The unemployment rate is seen edging up to 6.9% from 6.8%, while the participation rate is expected to hold at 66.0%. The reason behind our bullish NFP view is a result of the continued declines in weekly jobless claims of the past four weeks, which dragged the latest four-week moving average to 14-year low of 279,000. Nine-year highs in the employment component of the services ISM following five consecutive monthly gains, as well as persistent strength in the ADP measure of private payrolls back up our bullish expectations. The 115.30 target in USD/JPY anticipated here is just a temporary stop on the way to 117.80-118.20.

EURCHF Nov 6

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.