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The Swiss Franc looks vulnerable in the coming session as June's headline inflation data threatens to embolden the central bank's efforts to depreciate the currency. The Consumer Price Index is expected to shrink at an annual pace of -1.1% in June, the fourth consecutive month of losses and the largest drop in at least 33 years.

Key Overnight Developments

• Australian Service Sector Expands For The First in 15 Months
• Euro, British Pound Retrace Higher After NY-Session Losses
• Chinese Central Bank Chief, Former VP Comments Support USD


Critical Levels

7-3-09

The Euro retraced moderately higher in the overnight session after sustaining heavy losses in US trading hours, adding as much as 0.5% against the US Dollar. The British Pound followed suit, testing as high as 1.6394 to the greenback.

Related Article: US Dollar Range to Yield to Bullish Momentum Against Major Currencies


Asia Session Highlights

Australia's service sector grew for the first time in 15 months in June. The AiG Performance of Service Index rose past the 50 mark, the break-even point indicating expansion, rising 10.3 points from the month prior. The metric failed to garner considerable attention form the market with traders discounting the outcome as driven by the government's aggressive spending efforts, with the big question going forward continuing to be whether the economy will retain current momentum after the flow of stimulus cash dries up.

China's former Vice Premier Zeng Peiyan said he sees no dramatic change in the international currency system while the central bank head Zhou Xiaochuan said that lower US demand poses a risk for China, [threatening] overcapacity, weaker economic growth, and unemployment. Both comments hint at China's confidence in and support of a stronger US Dollar, suggesting Beijing will continue to accumulate US assets (Treasury bonds in particular) to keep the domestic currency relatively cheap against the greenback and support the export sector.

Euro Session: What to Expect

The Swiss Franc looks vulnerable in the coming session as June's headline inflation data threatens to embolden the central bank's efforts to depreciate the currency. The Consumer Price Index is expected to shrink at an annual pace of -1.1% in June, marking the fourth consecutive month in negative territory and the largest decline in at least 33 years. The statement issued by the Swiss National Bank following their quarterly policy meeting in June said that the risk of deflation remains a concern and reiterated their aim to continue driving long-term borrowing costs lower by buying local currency-denominated bonds and committed to take firm action to prevent an appreciation of the Swiss franc against the euro. At this point, the SNB expects inflation to shrink -0.5% on average over 2009 and rebound to add 0.4% next year. The International Monetary Fund (IMF) seems to disagree, however, calling for CPI to fall -0.6% this year and -0.3% in 2010. A downside surprise in June's report could open the door for traders to punish the Franc as they price in a likelihood that the SNB's outlook will prove too rosy, requiring the bank to step into the forex market at an accelerated pace to drive down the CHF exchange rate. The possibility of such an outcome seems reasonable considering the leading Producer and Import Prices reading fell by a greater-than-expected -5.0% in May, topping forecasts for a -4.7% decline.

Turning to the Euro Zone, Retail Sales are expected to fall -0.1% in May to bring the annual pace of decline to -2.7% and reversing two consecutive months of slowing losses. On balance, receipts continue to move firmly in line with the downward trajectory that has held since sales topped out in December 2006. Lackluster consumption has trimmed an average -0.9% off overall economic growth in the six months ending in March and losses are likely to accelerate as European companies continue to shed jobs: the jobless rate hit the highest level in a decade in May and is expected to top 10% by the end of this year according to a survey of economists conducted by Bloomberg.

In the UK, June's services Purchasing Manager Index is set to show that the sector expanded for a second consecutive month after the metric swung above the 50 boom-bust level in May for the first time since April 2008. The most recent economic forecast from NIESR, a think tank, suggested the trough of the depression, with output rising in April and May after GDP shrank -2.4% in the first quarter, the most since 1958. To that effect, first-quarter Housing Equity Withdrawal figures may a muted impact as the metric falls to a record-low -9.0 billion pounds as a terrible three months to March have likely already been priced into the exchange rate. On balance, consensus economic growth forecasts suggest that the UK will trail behind the US but outpace the Euro Zone through the end of 2010, suggesting the Bank of England will follow the Fed but lead the ECB in lifting interest rates as the recovery firms. All told, this points to a bearish bias for both GBPUSD and EURGBP in the months ahead.

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