Three factors seem to be responsible for the holding pattern developing in this market.
First, there is no interest rate differential with which to work. Both the U.S. Federal Reserve and the Swiss National Bank have held interest rates at close to zero for several months. This means that neither country is more attractive than the other when it comes to interest rates. Although expectations are for U.S. rates to be higher one year from now, this line of thought is not being reflected in the market at this time.
Second, the sensitivity of the Swiss Franc to the price of gold has put downside pressure on the market. There is no question that at times the Swiss Franc moves lock-step with gold. The September Swiss Franc has felt modest pressure since the gold market topped in early June. Since then the trend in both markets has been sideways-to-lower. Look for this pattern to continue unless gold makes a sharp move downward. If this occurs then the Swiss Franc should break support and accelerate to the downside.
Third, speculators seem to be challenging the Swiss National Bank’s efforts to weaken its currency through intervention. Since March the SNB has made no secret that it wants to see a weaker currency against the Euro. This has led to two significant interventions in which the SNB aggressively bought the Euro and the U.S. Dollar while simultaneously selling Swiss Francs. Both interventions had dramatic one day effects on the Swiss Franc but each time speculators stepped in to stop the decline.
The latest action by the Swiss National Bank on June 24 triggered a massive break in the September Swiss Franc but speculators went on a buying spree the very next day to help start a rally that took back more than 50% of the intervention break.
The battle between speculators and the Swiss central bank has created a range bound market that is ping-ponging between a pair of 50% levels at .9176 to .9246. The sideways action and the relative ease that speculators have moved the currency in the wake of the interventions have raised questions about the effectiveness of the SNB’s strategy.
History has shown that despite having access to seemingly unlimited amounts of funds, central banks can lose the intervention battle. This may be inflationary over the long-term if the situation is not monitored or kept in check. With a solid top established at .9449 and the intervention bottom set at .9075, do not be surprised if this market stays in a range for a couple of more months. Based on an intervention in March and June, the Swiss National Bank may not try to intervene again until September. This pattern may change depending on how aggressive the SNB wants to get. Traders should also note that the SNB may decide to sell gold in an effort to weaken the currency.
Following two days of sideways action, the uptrend in the September Treasury Bonds is continuing overnight. The current chart pattern suggests this market should test 121’02 before seeing some technical selling.
Yesterday’s break in the September E-mini S&P 500 came close to testing the May bottoms at 873.75 and 872.25. Overnight this market seems to be stabilizing which may be indicating this market is poised for a substantial retracement to the upside. Based on the weekly day session range of 907.25 to 875.25, don’t be surprised by a rally back to 891.25.
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