EUR/CHF climbs back towards 1.20
After hitting 1.1368 at the beginning of the summer, EUR/CHF has been climbing its way back to 1.1696. However, the currency pair is still well below the multi-year high that was reached at the beginning of the second quarter. Indeed, the currency pair passed the 1.20 threshold before grinding towards 1.1368 amid the nomination of the new Italian government, mounting trade war fears and an unexpectedly dovish ECB.
The recovery in EUR/CHF is therefore exclusively due to the improvement in risk sentiment rather than the strengthening of the single currency. SNB kept a stiff upper lip and didn’t change a thing in its strategy. Total sight deposits held within the SNB have been quite stable since mid-2017, which suggest that the SNB didn’t intervened in the FX market; after all, EUR/CHF is well outside the danger zone.
The Swiss National Bank will maintain its wait-and-see approach and will let the ECB be the first mover. For now the market, is expecting Mario Draghi to start raising rates in mid-2019. With risk sentiment improving across the board, the recovery in EUR/CHF should continue. However, trade tensions between the US and its main trading partners remain of major concern for investors. A quick deterioration in market environment could ignite a CHF appreciation. We maintain our objective of 1.20 for the end of the summer.
Chinese growth slowing, currency stumbles
Chinese Q2 GDP rose 6.7% year-on-year, in line with market expectations. Seasonally adjusted quarter-on-quarter growth remains comfortable at 1.80%. However, the economy is showing some weakness: June fixed asset investment (6%; prior: 6.10%), industrial production (6%; prior: 6.80%) and retail sales (9%; prior: 8.50% but below 2-year average of 10.20%). Money supply is tightening, due to caution of financiers and debt risk, so the Chinese economy is expected to slowdown industrial activity and private consumption. Trade tariffs will be a key factor in coming months. Further CNY weakness is expected: now at 6.6845, USD/CNY is approaching the 6.675 in the short-term.
