Swiss Exports Plunge, USD Extends Gains

News and Events:

Swiss exports correct to the downside

After surging to a record level in December (+9.7%m/m), Swiss exports contracted significantly in January, sliding 4%m/m in real terms. Despite the fact that this is not good news for the Swiss economy, it is a normal adjustment for us, especially after such strong growth in December. Looking at the details of the report, we notice that the split among industries is quite uneven. The pharmaceutical and chemical industry had a solid month with exports rising to a record of CHF 9bn (+17%y/y). Outside the pharma industry, the picture is not that bright as exports fell 5%m/m, with the watch industry recording one of its worst months (-11%y/y).

Imports continued to shrink in January, falling 5.3%m/m in January after sliding -0.6% in the previous month. All in all, the trade balance reached an all-time high to CHF 4.73bn, the highest level since September 2016. The constantly improving Swiss trade activity is a thorn in the side for the SNB as it is lifting the bank’s foreign exchange reserves. The 12-month trade balance average hit CHF 3.22bn in January, compared to 3.06bn a year ago.

For now, the Swiss franc is still appealing for investors who want to take shelter from the ongoing uncertainty – especially ahead of the parliamentary and presidential elections across EU countries. However, the Swiss economy will continue to suffer from the situation and the outlook is not that great should political uncertainty in the European Union further deepen. In spite of the probable intervention of the SNB on the FX market last week, EUR/CHF hit 1.0635 this morning, suggesting that the marginal effect of the intervention has dwindled.

Aussie suffers against the dollar ahead of RBA meeting minutes

The minutes from the Reserve Bank of Australia only provided a minor update from the February statement on monetary policy.

The discussions were around the surprising 0.5% contraction in real GDP for the third quarter of 2016. Officials account that the decline was due to short-term factors such as bad weather, which had a strong impact on the construction sector, and on the coal supply weakness.

What remains concerning for Australian policymakers are the consumption forecasts. Indeed, the savings rate is not falling and wages growth remains low. Uncertainties remain strong regarding labour data and unemployment rate forecasts are mixed. Yet there are expectations for better job market conditions, which should add upside pressures on inflation.

There is certainly nothing really surprising about these minutes and we continue to believe that the official cash rate will remain unchanged this year. Financial markets are only pricing in a 25% likelihood a rate hike before year-end. As a result, markets were slightly disappointed this morning and sent the AUD lower against the greenback. We target 0.76 over the next few weeks.

Watching for March hints

Traders will be watching today’s FOMC early February meeting minutes especially vigilantly for any signal of a March interest rate hike. Fed Chair Yellen made it clear in her testimony to the US congress last week that March will be a live meeting. Investors have been pulling in expectations for an earlier rate hike due to an upward surprise in both growth and inflation data. US headline CPI rose 0.6% in January at its fastest pace since Feb 2013, while the annual pace quickened to 2.5%. However, with the real focus in stronger then anticipated inflation, volatile components (gasoline, new car sales and clothing) indicted that part of the price surge will normalise in the coming months. Despite the read clearly in Yellen’s discomfort zone (and hawks Lacker and Rosengren’s aggressive comments), it is unlikely to force a hike in our view. In broader terms, we suspect that the lack of wage growth suppressed by the low participation rate will keep the Fed from jumping the gun. Fed members will also like to stay prepared to adjust for disruptive incoming fiscal and trade policy. Fed funds are pricing in approximately a 20% hike in March and 47% in June. We remain our outlook for two 25bp increase in 2017 (June and September) and two additional 25bp hike in 2018. This subdued rate path will fail to excite the USD bulls, while giving other nations’ central banks time to shift to less accommodating monetary policy and therefore lessening the US yield advantage. Markets will also be reading for hints as to discussion among Fed policymakers about timing on shrinking the Fed’s massive, $3 trillion plus, balance sheet. Traders should watch for USD to firm ahead of report but likely sell off should our outlook materialise.

Today’s Key Issues (time in GMT):

• Feb P Markit France Manufacturing PMI, exp 53,5, last 53,6 EUR / 08:00
• Feb P Markit France Services PMI, exp 53,9, last 54,1 EUR / 08:00
• Feb P Markit France Composite PMI, exp 53,8, last 54,1 EUR / 08:00
• Jan Money Supply M3 YoY, last 3,00% CHF / 08:00
• Feb P Markit/BME Germany Manufacturing PMI, exp 56, last 56,4 EUR / 08:30
• Feb P Markit Germany Services PMI, exp 53,6, last 53,4 EUR / 08:30
• Feb P Markit/BME Germany Composite PMI, exp 54,8, last 54,8 EUR / 08:30
• Feb P Markit Eurozone Manufacturing PMI, exp 55, last 55,2 EUR / 09:00
• Feb P Markit Eurozone Services PMI, exp 53,7, last 53,7 EUR / 09:00
• Feb P Markit Eurozone Composite PMI, exp 54,3, last 54,4 EUR / 09:00
• Jan Public Finances (PSNCR), last 36.3b GBP / 09:30
• Jan Central Government NCR, last 19.3b GBP / 09:30
• Jan Public Sector Net Borrowing, exp -14.4b, last 6.4b, rev 4.2b GBP / 09:30
• Jan PSNB ex Banking Groups, exp -14.0b, last 6.9b, rev 4.7b GBP / 09:30
• BOE Governor Mark Carney Speaks in U.K. Parliament GBP / 10:00
• BOE Chief Economist Andy Haldane Publishes Annual MPC Report GBP / 10:00
• Fed’s Kashkari Speaks on Economy in Golden Valley, MN USD / 13:50
• Feb P Markit US Manufacturing PMI, exp 55,3, last 55 USD / 14:45
• Feb P Markit US Services PMI, exp 55,8, last 55,6 USD / 14:45
• Feb P Markit US Composite PMI, last 55,8 USD / 14:45
• Bank of England Bond Buying Operation GBP / 14:50
• Feb 17 Bloomberg Nanos Confidence, last 57,3 CAD / 15:00
• Fed’s Harker to Speak on Economic Outlook USD / 17:00
• Fed’s Williams Speaks to Students in Boise, Idaho USD / 20:30
• RBA’s Lowe Speech in Sydney AUD / 21:30
• Jan Unemployment Rate, exp 5,40%, last 5,30% RUB / 23:00
• Jan Real Disposable Income, exp -2,90%, last -6,10% RUB / 23:00
• Jan Real Wages YoY, exp 2,00%, last 2,40% RUB / 23:00
• Jan Retail Sales Real MoM, exp -27,00%, last 18,30% RUB / 23:00
• Jan Retail Sales Real YoY, exp -5,10%, last -5,90% RUB / 23:00
• Jan Formal Job Creation Total, exp -45324, last -462366 BRL / 23:00
• Jan Tax Collections, exp 137340m, last 127607m BRL / 23:00
• SURVEY: Private Capital Expenditure 2017-18 A$84.8b AUD / 23:00

The Risk Today:

EUR/USD is back below 1.0600. Hourly resistance is given at 1.0679 (16/02/2017 high) while hourly support can be found at 1.0521 (15/02/2017 low). The technical structure suggests that the current underlying move is a bearish consolidation. 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 lying within a symmetrical triangle below strong resistance given at 1.2771 (05/10/2016 high). The technical structure suggests that the pair should breakout towards support given at 1.2254 (19/01/2016 low). 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’s demand is fading after its increase from support given at 111.36 (28/11/2016 low). Bearish pressures arise around hourly resistance given at 115.62 (19/01/2016 high). The technical structure suggests further weakness. 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‘s short-term bullish momentum is back to bullish. The pair lies within an uptrend channel. Hourly resistance is implied by upper bound of the uptrend channel. Key resistance is given at a distance at 1.0344 (15/12/2016 high). We believe that the pair is likely to strengthen again above parity. 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.