Risk currencies are tracking the latest rise in equity markets as traders begin re-entering the market after the New Year’s holiday. Part of the optimism is coming from the positive Chinese PMI manufacturing data, which still managed to show expansion (albeit barely) and this led to some selling in the safe haven assets. Positive Chinese data is generally a positive for Australian markets (as this is where most of their exports are sold), so the data helped push the AUD/USD back above 1.0300, where it is still holding onto its gains. Similar moves were seen in the NZD/USD as markets begin looking for higher yields.
Not all of the news was positive, however, as similar reports out of the Eurozone were not as encouraging. The December PMI manufacturing released yesterday came in at 46.9 (which is in contractionary territory). To reverse this, Eurozone member nations will need to successfully implement their proposed austerity plans, and this is where most of the attention will be centered in 2012. Shorter term, we will not see bond auctions in Spain and Italy until next week, so this event risk is still some ways off.
The next key event risk will come with the ISM manufacturing data out of the US today, which is expected to deviate from the results in the Eurozone and show expansion at 53.4. Another factor to keep in mind is that it is an election year in the US and actual voting begins today in the Iowa caucuses. The US economy is likely to be the central focus in the election and this will be given some additional attention today as the meeting minutes from the last FOMC policy meeting, so this will give us an indication of some of the issues that could be discussed into the election.
In Switzerland, we will see the release of December CPI, and any weakness in this data will most likely lead to discussions about the price floor that the Swiss National Bank put in place in the EUR/CHF. Signs of deflation will lead some analysts to forecast a rise in this price floor (from 1.20) as a means for stimulating the country’s export markets. Markets are expecting the CPI to drop -0.6 percent, so any major deviations could bring some volatility into currency markets. We will also have PMI data from the Swiss, as well as Norway and the UK.
The EUR/CHF has been showing some uncharacteristic weakness recently, with prices falling to new hourly lows at 1.2135. We are viewing this as a very favorable entry area, as the downside is unlikely to extend beyond 1.20. Stops can be placed below this level, targeting a rise to at least 1.25. This trade also has carry value, so holding it long term also has its advantages.
The S&P 500 is starting to show some signs of failure ahead of key technical levels as the daily downtrend line is being tested in conjunction with a bearish MACD indicator reading. A MACD crossover into negative territory could show some significant downside follow through, as prices have no support until the Fibonacci level above 1230.