Dovish Fed Sends USD Lower, SNB On Hold

News and Events:

The Fed’s three-hike pipe dream

As widely expected, the Federal Reserve increased borrowing rates by 25bps to 0.75%-1%. This is the second interest rate lift in four months and nobody got it wrong. So, no surprise here, however the greenback plunged sharply during Yellen’s press conference with rates collapsing along the yield curve. Monetary sensitive 2-year treasury yields as well as the 10-year slid 9bps to 1.30% and 2.48% respectively. In the FX market, the single currency hit 1.0746 against the dollar as investors unwound their long USD positions. Interestingly, the disappointing defeat of Geert Wilders’ Freedom Party provided an additional boost.

So what exactly happened? Just as we wrote yesterday, the market mis-priced the tightening path beyond the March rate hike and when Janet Yellen adopted a dovish tone and wording during the press conference, investors quickly caught on that the three rate hikes promised for 2017 were in fact a pipe dream. Yes, the US economy is still in recovery in that growth is positive, however dark clouds have begun to gather on the horizon. One of the most disconcerting of all – as also mentioned in our report yesterday – is the negative trend in real wage growth. In February, data showed that real wages contracted 0.5% compared to a year ago. This is a major issue as consumer spending accounts for roughly 70% of the US GDP. Moreover, less disposable money for consumers means less price pressure, which translates into falling consumer prices, which ultimately means that the Fed will have to increase rates slowly if not taking a break during the process altogether.

The greenback is staring down the barrel of some complicated times ahead as investors slowly switch to risk-on mode and move towards higher yielding assets. In the short-term, EUR/USD will continue to suffer from the political uncertainty stemming from the French election. CHF and JPY have room for further appreciation against the USD.

SNB maintains course

Unsurprisingly, the Swiss central bank has decided to steer straight ahead, holding interest rates unchanged at -0.75%. Even though defending the franc is a clear SNB priority, rates will not be pushed much lower out of fear of boosting capital outflows. Recent strong intervention from the Swiss central bank pushed the EURCHF towards 1.0800 before bouncing lower.

These periods of uncertainty of having more margins to defend the Swiss franc seem to define the SNB’s strategy as the currency is still largely seen as overvalued.

In terms of data, retail sales saw a drop in January at -1.4% y/y, while Switzerland’s Q4 2016 printed below expectations at 0.6%.

The SNB’s wait-and-see approach is clearly set to continue as Europe remains on tenterhooks despite Geert Wilder’s Populist Party defeat. In the short-term, it is likely that we will see further euro weakness against the CHF.

Today’s Key Issues (time in GMT):

• 4Q Labour Costs YoY, last -0,50% EUR / 08:00
• mars.16 SNB Sight Deposit Interest Rate, exp -0,75%, last -0,75% CHF / 08:30
• mars.16 SNB 3-Month Libor Lower Target Range, exp -1,25%, last -1,25% CHF / 08:30
• mars.16 SNB 3-Month Libor Upper Target Range, exp -0,25%, last -0,25% CHF / 08:30
• Feb Unemployment Rate, exp 7,30%, last 7,30% SEK / 08:30
• Feb Unemployment Rate Trend, last 6,90% SEK / 08:30
• Feb Unemployment Rate SA, exp 6,80%, last 6,80% SEK / 08:30
• mars.16 Deposit Rates, exp 0,50%, last 0,50% NOK / 09:00
• Feb CPI MoM, exp 0,40% EUR / 10:00
• Feb F CPI YoY, exp 2,00%, last 2,00% EUR / 10:00
• Bank of Italy’s Visco Speaks in Milan on EU Treaties EUR / 10:00
• Feb F CPI Core YoY, exp 0,90%, last 0,90% EUR / 10:00
• mars.15 FGV CPI IPC-S, exp 0,34%, last 0,34% BRL / 11:00
• mars.16 Benchmark Repurchase Rate, exp 8,00%, last 8,00% TRY / 11:00
• mars.16 Overnight Lending Rate, exp 9,25%, last 9,25% TRY / 11:00
• mars.16 Overnight Borrowing Rate, exp 7,25%, last 7,25% TRY / 11:00
• mars.16 Late Liquidity Lending Rate, exp 11,75%, last 11,00% TRY / 11:00
• mars.10 Foreigners Net Bond Invest, last -$99m TRY / 11:30
• mars.10 Foreigners Net Stock Invest, last $134m TRY / 11:30
• mars.16 Bank of England Bank Rate, exp 0,25%, last 0,25% GBP / 12:00
• Mar BOE Asset Purchase Target, exp 435b, last 435b GBP / 12:00
• Mar BOE Corporate Bond Target, exp 10b, last 10b GBP / 12:00
• Jan Int’l Securities Transactions, last 10.23b CAD / 12:30
• Feb Housing Starts, exp 1264k, last 1246k USD / 12:30
• Feb Housing Starts MoM, exp 1,40%, last -2,60% USD / 12:30
• Feb Building Permits, exp 1268k, last 1285k, rev 1293k USD / 12:30
• Feb Building Permits MoM, exp -1,90%, last 4,60%, rev 5,30% USD / 12:30
• mars.11 Initial Jobless Claims, exp 240k, last 243k USD / 12:30
• mars.04 Continuing Claims, exp 2050k, last 2058k USD / 12:30
• Mar Philadelphia Fed Business Outlook, exp 30, last 43,3 USD / 12:30
• mars.10 Gold and Forex Reserve, last 393.4b RUB / 13:00
• mars.12 Bloomberg Consumer Comfort, last 50,6 USD / 13:45
• Mar Bloomberg Economic Expectations, last 50 USD / 13:45
• Jan JOLTS Job Openings, exp 5562, last 5501 USD / 14:00
• Revisions: Job Openings and Labor Turnovers USD / 14:00
• ECB’s Praet speaks in Brussels EUR / 18:00
• Feb BusinessNZ Manufacturing PMI, last 51,6 NZD / 21:30
• 4Q BoP Current Account Balance, exp -$12.00b, last -$3.40b INR / 22:00
• Feb Foreign Direct Investment YoY CNY, exp -4,20%, last -9,20% CNY / 23:00
• Feb Industrial Production YoY, exp 1,30%, last 2,30% RUB / 23:00
• Feb Tax Collections, exp 93244m, last 137392m BRL / 23:00

The Risk Today:

EUR/USD is strengthening. The pair is lying in an uptrend channel. Key resistance is still given at a distance 1.0874 (08/12/2017 high). Strong support can be found at 1.0493 (22/02/2017 low). The technical structure suggests deeper increase towards resistance at 1.0874. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD is moving up but the pair remains around support given at 1.2254 (19/01/2017 low). The road is still wide-open for further decline. Hourly resistance is given at 1.2300 (05/03/2017 high). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY has failed to break key resistance given at 115.62 (19/01/2016 high). Hourly support given at 113.56 (06/03/2017 low) has been broken. Expected to push lower. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF has exited uptrend channel. Hourly support given at 1.0075 (13/03/2017 low) has been broken. Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to consolidate. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.