ECONOMETER

The US debt ceiling continues to garner most attention in markets, with US Treasury Secretary Geithner warning in a letter to Congress about the adverse economic impact of the failure to raise the ceiling. President Obama gave a similar warning, but with current extraordinary measures due to run out between mid February and early March timing is running out.

While Fed Chairman Bernanke echoed this assessment markets found some relief in his speech as it did not repeat the views of some Fed officials in hinting at an early ending of QE. Bernanke qualified his comments by stating that believes that inflation will stay below 2% over the medium term.

EUR/USD could not hold onto highs around 1.3404 but the currency pair does not looks as though it is running out of momentum. As sentiment towards the Eurozone periphery continues to improve and inflows into Eurozone assets increases the EUR is finding itself as a key beneficiary. However, the strength of the currency will only reinforce the weak economic backdrop across the region, which eventually will come back to bite the EUR.

Indeed data today is likely to confirm that the German economy recorded a weak pace of growth over 2012 finishing the year with a contraction in activity over Q4. Our forecast of no growth in the Eurozone this year could face downside risks should the EUR continue to rise. This is unlikely to stem the near term upside for EUR/USD but adverse growth and yield differentials compared to the US will mean that gains in EUR/USD will not be sustained.

The long awaited move higher in EUR/CHF appears to be finally occurring. EUR/CHF is trading at its highest level in over a year and looks set to make further gains. The fading of Eurozone crisis fears, better global economic developments and search for yield, are combining to pressure the CHF versus EUR although USD/CHF is trading near multi month lows.

Additionally improving sentiment outside of Switzerland is not echoed within the country as domestic indicators have worsened recently such as the KoF leading indicator, adding further pressure for a weaker CHF. Recent inflation data revealing a 0.4% YoY in December, the 15th month of annual declines have reinforced the fact that the currency is overly strong. EUR/CHF looks set to move higher, with the December 2011 high of 1.2444 the next target.