Draghi unruffled CHF up and bothered NFP next

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.