EUR better bid despite Italian uncertainties
The single currency extended gains on Wednesday with EUR/USD finally breaking the 1.1745 resistance to the upside and EUR/CHF climbing towards 1.16. The fact that the euro is not getting under more significant pressures could be surprising, especially after the new Italian government won the Senate confidence vote. However, Giuseppe Conti, the prime minister, said his government has no intention to leave the Eurozone but called for a redistribution of asylum seekers around the EU. In his first speech before the senate, he reiterated the anti-austerity calls of the coalition and a friendlier stands towards Russia.
Even though everything seems to go well in the FX market, the same cannot be said for the bond market. Indeed, Italian yields climbed further yesterday and the move continued on Wednesday with the 2-year and 10-year rates rising as much as 1.49% and 2.96%, respectively. Market participants also dumped Italian equities as the FTSE MIB fell more than 1% during the European morning.
Therefore, it looks like investors do not believe the Italian situation will affect negatively the entire EU but will remain contained to Italy. Investors are fleeing Italian assets but not European one, for now at least. Against such a backdrop, we would rather remain cautious regarding a return of EUR/CHF around 1.20 in the short-term. On the other hand, believe that that there is room for further appreciation in EUR/USD as the trade war between the USA and its allies will weigh on the greenback.
Swiss CPI higher
In a surprise move Switzerland consumer price inflation rose higher then forecasts. The move will certain triggers speculation of quicker normalization of extreme policy. Swiss May CPI came in at 0.4% m/m vs. 0.3% m/m exp (1.0% y/y vs. 0.9% y/y) while core CPI climbed 0.1% m/m and 0.4% y/y. The higher read was spread around underlying components indicating a continue of strong trend since Feb 2016. Yet simple projections have inflation reaching the SNB target around late 2019, so the central banks is unlikely to panic when it see these numbers. Call to push forward the tightening cycle is likely to fall on deaf ears. With political risk rising in Europe resulting into a stronger CHF, the SNB will stay steadfast in current defensive policy mix. In fact at 21st June rate decision we will likely hear further commitment by the SNB to weaken “overvalued” CHF, rather than acknowledging inflations pressures.
The SNB has played a dangerous game with extreme policy actions, unwinding these actions will come with significant certainties. Even subtle changes in languages could be the catalyst to reloading CHF long by investors who have long abandoned the currency due to high carry costs. EURCHF was higher on the news as trades remain focused on the short term positive news out of Italy over the long play of SNB policy.
Ramaphoria effect is subdued
Cyril Ramaphosa’s challenge is lively. Since his appointment as South African President on 15. February 2018, the Head of State is facing a strong economic downturn, with Q1 economic output given at 9-year low (-2.20%; prior: 3.10%), strongly impaired by most relevant industries and specifically Agriculture, Forestry, Fishing (-24.20%), Mining & Quarrying (-9.90%) and Manufacturing (-6.40%) compared to Q4 2017.
Indeed, the recent development in GDP will probably deteriorate business and consumer confidence, putting into question Ramaphosa’s capability to reform the country appropriately. We would however balance the statement due to current geopolitical tensions and underlying trade tensions incurred by most economic partners and particularly South Africa’s first trade partner, China. South African economic growth remains fragile and the situation exceeds the range of actions of its leaders.
Accordingly, market reactions were swift after the publication. The rand weakened further, decreasing by 2.01% against the greenback, valued at 12.8575 and trading at mid-December 2017 range. The pair is expected to strengthen further, approaching the 12.90 range in the mid-term.
