Short the pound
USD has been broadly weaker against a stronger sterling. UK Brexit Minister Dominic Raab says he can reach a deal by 21 November 21, but that seems likely to be on EU terms. We remain negative on “soft” Brexit developments and view the pound’s recovery as an opportunity to short. An inflation report today and the Bank of England’s monetary policy meeting are likely to highlight uncertainty. Despite tight labour markets, prices are decelerating.
Elsewhere, markets have shifted sideways as Europe takes off for All Saints Day. A bounce in risk sentiment is supported by China’s fiscal easing and solid US economic data (stronger PMI and an expected good ISM read this afternoon). However, recovery is tentative. The Shanghai composite is only slightly higher at 0.13%. EUR/USD recovered off 1.1300, yet the US economic data should derail gains
Swiss economy walks a tightrope
There are reasons for optimism and for pessimism. On the plus side, GDP grew 3.2% in Q2, well above its recent average. But growth seems to be slowing, and the risks of a trade war are weighing on exports. According to Swiss National Bank President Thomas Jordan, a trade war would have a strong impact on the Swiss economy, while the risk of monetary policy mistakes would rise. SNB returns have whipsawed: Q3 saw a loss on foreign currency investments of CHF 12.94 billion, down from a record profit of CHF 33.7 billion in Q3 2017.
Switzerland’s economic outlook remains driven by the development in trade and the mounting debt pile of the SNB, estimated at CHF 700 billion. Switzerland’s safe haven status might prove to be a burden in the coming quarters. For now, inflation continues to advance slightly in October (CPI +1.10% annually and +0.20% monthly). Since the beginning of the 2018, the CHF appreciated by 2.92% and 2.47% against USD and EUR respectively, putting pressure on exporting industry margins and thus putting manufacturing activities downward.
After reaching a 15-month low in the beginning of September of 1.12, the EUR/CHF is bouncing back, approaching the 1.1430 range short-term.
