EUR/CHF Jumped As Markets Believe Draghi Will Deliver

Euro remains firm but stays in tight range against dollar and yen as markets are awaiting for ECB's post meeting conference today. Some information was leaked this week and so far, investors seemed to be pleased with the limited details obtained. The new bond program, under the framework called "Monetary Outright Transactions" would involve unlimited purchases of government debt that will be sterilized (like under the SMP).

Yet, the central bank would refrain from setting a public cap on yields and will target short-dated maturities of up to about three years. Also, ECB could be prepared to eliminate the seniority status on bonds. That means, ECB won't have the right the be paid back first, and private investors won't be pushed down the the creditor pecking order. Regarding interest rates, markets are split on whether ECB would cut the key interest rate by 25bps to another record low at 0.50%. Meanwhile, markets are also uncertain on how the central bank would handle the deposit rate, which is usually 75bps below the key interest rate and is currently at zero.

As a vote of confidence that ECB Draghi would deliver, EUR/CHF staged a strong, sustainable rebound yesterday and is back above 1.2050 for the moment. We'd like to point out that the jump is EUR/CHF wasn't a spike like that happened on August 6. Also, buying seems to be much more persistent than what happened back in late May. And indeed, yesterday's close was the higher since April.

Judging, from the extend of the rally, it doesn't look like it's due to rumors of SNB raising the floor to 1.25, in response to recent poor economic data. If that's the case, the rise should be much more violent and EUR/CHF shouldn't be capped below 1.21. And, thus, we'd like to emphasize that markets seem to be quite firm that Draghi will deliver as even the sleeping EUR/CHF moved. And Draghi'd better do so.

Elsewhere, Australian dollar recovers mildly after data showed that unemployment rate unexpectedly declined to 5.1% in August. however, it's believed that it's a decline of participation rate, from 65.2% to 65.0%, that led the unemployment rate lower. The job market has indeed contracted -8.8k which July's figure was revised down to 11.7k.

Looking ahead, BoE likely keep rates unchanged at 0.5% and maintain the asset purchase target at GBP 375b today, and thus would be a non-event. Eurozone GDP and Germany factory orders will be released in European session. Meanwhile, ADP employment change from US will be featured with jobless claims and ISM services. While ECB press conference is the major event, the US data could also shake the markets.