In a possible sign of strength, the EUR CHF continued to hold the weekly gap created the week-ending November 4. Even with this potentially positive development the weekly range remained tight and rangebound while the daily action was choppy. Although the Euro traded weaker, it was clear that no one wanted to take on the Swiss National Bank so trading became subdued. Traders also seemed to be waiting for the next move by the SNB, rumored to be the raising of the currency peg to 1.30.
Facing the difficulty of trying to decipher the SNB’s next action, while wading through the uncertainty of the deepening European debt crisis, what appears to be certain is that traders truly don’t know how to play the market at this time. Watching the Euro fall apart and having no where to go for liquidity other than the U.S. Dollar and the Japanese Yen is encouraging Euro/Swiss traders to sit on there hands while waiting for concrete direction from the central bank.
This week traders will be focused on the developments in Europe regarding the two new governments in Greece and Italy. Of special importance will be the continuing European Central Bank support of Italian and Spanish bonds. This action offers the best outlook for contagion which is the biggest fear of all at this time.
The ECB supported this debt by allocating funds 70/30 to Italy and Spain. Traders should watch for a change in this allocation or the addition of another country to the mix. These would be strong indications that the debt problem is spreading. Another factor to watch closely is the yields in both of these countries. Rising yields means an increase in the cost to finance debt. It is conceivable that debt costs will rise so high to make the debt unserviceable. This could lead to default.
If the European crisis continues to worsen, then look for traders to maintain pressure on the EUR CHF. An easing of tensions and the lack of action from the SNB could be enough to underpin this currency pair.
On Tuesday the Swiss will release data on October imports and exports for the month. This will be important because it will reveal how much of a negative influence the high priced Swiss Franc has had on the sale of goods and services to other countries. An extremely weak report may force the SNB to take action to weaken its currency further.
The Euro Zone will counter this report with consumer confidence. Traders will be interested in seeing whether the expanding debt crisis has shaken consumer sentiment.
On Wednesday German PMI as well as Euro Zone new factory orders could influence the trade. Also news will be coming from the U.S. regarding the congressional super committee formed to tackle the huge deficit. Preliminary reports indicate that no agreement has been reached, leading to speculation that one or more rating services will lower the U.S. debt rating. This could be bullish for the Euro.
Thursday is a U.S. holiday so trading may be slow and thin. Early in the trading session, however, Germany will release its third quarter GDP figures. Expectations are for the number to be unchanged at 0.5%. Also due out is the IFP survey. This business sentiment indicator is expected to move lower from the previous month.
Despite these major reports, the main focus will be on the Euro Zone debt crisis and the Swiss National Bank. If the debt crisis continues to show signs of expanding then look for the pressure to be on the EUR CHF. The key import/export report could set the tone for the Swiss Franc if the SNB decides to take action. There are still rumors out there that the central bank is poised to move its current peg at 1.20 as high as 1.30. Even though traders are aware of this rumor, its actual implementation is likely to shock the market.