USDCHF Hits Record Low - 25.2.2011

The dollar continued to surrender ground during the Asia session, and USDCHF set a new all-time low. EURUSD traded 1.3787-1.3838, USDJPY traded 81.68- 82.07. The euro and sterling remain supported by the prospect of rate hikes to tame inflationary pressures, especially as oil prices stay firm due to tensions across the Middle East and North Africa. Even a better initial jobless claims could not boost the dollar as Treasury yields remained subdued and oil prices elevated. Jobless claims fell more than anticipated, continuing the recent downtrend. January headline durable goods orders rose, while orders ex-transportation were much weaker. New home sales also fell more than expected, declining 12.6% m/m. St Louis Fed President Bullard, a non-voter in 2011, said the economic outlook has improved since QE2 was announced and that "the natural debate now is whether to complete the program, or to taper off to a somewhat lower level of asset purchases." This is significant because he is historically a hawk but has been very supportive of the QE2 program. He isn't making a strong argument for curtailing the QE2 program, but is certainly highlighting the risk that the Fed might do that.

EUR

Bundesbank President Weber said interest rates can only go up in the future, which briefly boosted the euro. Bundesbank board member Dombret was also hawkish, saying that second-round price effects cannot be ruled out. German GDP for Q4 was confirmed at 4.0% y/y, 0.4% q/q, driven by strong export growth and public spending. The release shows a less balanced growth picture than in Q3, with capex down and private consumption sluggish. Italy is planning on selling approx. EUR5 bn in 2021 bonds, EUR3 bn in 2013 bonds and EUR1.5 bn in 2017 bonds. Recent auctions have gone well, though their impact on euro sentiment has diminished given that rate hike expectations are currently dominant. The behaviour of Italian spreads appears to have become more 'core-like' over the past year,

CHF

We expect a slight dip in the KOF leading indicator but external developments remain the key driver for the Swiss franc these days, as it continues to benefit from safe haven flows. Nevertheless, keep an eye on the data as an accommodative SNB and the end of Swiss economic outperformance could put some downward pressure on CHF.