Minutes to highlight divergence among Fed members
The solid print in retail sales and Empire Manufacturing Index yesterday helped the greenback to catch his breath. Retail sales advanced strongly in July, climbing 0.6%m/m (versus 0.3% expected), while previous month’s reading was revised to +0.3% (from -0.2% initially estimated). The core measure that excludes auto dealers and gasoline stations picked up 0.5%m/m following an upwardly revised figure of 0.3% in June. After a series of disappointing reports, it seems US consumer are finally ready to open their pockets. This acceleration a consumption is definitely of good omen for GDP growth as households consumption account for roughly 70% of the US economy and also to inflation. However, for the ladder, it will take a longer period to translate into firmer inflation reading.
The July FOMC minutes will be published later today and will likely show divergence, as usual, among Fed members. Last week, Bullard and Kashkari comments were quite dovish as they highlighted the persistent weak inflation pressures, while earlier this week Dudley appeared confident about the inflation outlook. Divergence, we told you. All in all, we believe that the minutes won’t be a game changer as the Fed will keep the surprise until September in order to have more flexibility.
The greenback extended gains this morning, rising the most against the Swiss franc, the Japanese yen and the euro. However commodity currencies and the pound sterling were edging higher, mostly due to positive local developments (strong wage growth in Australia, a pick-up in commodity prices and positive developments in the EU-UK relationship outlook).
EURCHF is heading higher but not for long
The Helvetic currency is suffering against the euro and the pair is back below 1.15. We nonetheless do not believe that the pair will continue to head towards 1.20 and the ongoing move may not be sustainable in the medium-term.
The fundamentals behind the recent surge of the single currency against the euro appears unclear. The economic and political situation have not changed during the summer. Yet we consider that this is only a catch-up as the euro strengthened against major G10 currencies on growing expectations of the Eurozone recovery. Markets now expect the ECB to narrow the monetary policy divergence with the Fed
European geopolitical tensions are also very calm during this summer. It is also important to remember that the massive Greek debt issue is far from solved and this will likely weigh again on the European Union unity.
Those basic reasons are our rationale on why downside pressures on the EURCHF pair are set to appear again. Markets definitely overestimate the Eurozone recovery.
