Jackson Hole in focus
Over the past few days, market participants have shoved aside their worries about monetary policy to focus on political developments in the US, more specifically the resignation of several of its advisors. Rumours that Gary Cohn may follow the pack triggered a wave of panic among investors. Equities took a hit with the S&P 500 ending in negative territory for the second week in a row, down 2.08% overall. The tech-heavy Nasdaq closed below the neutral threshold for the fourth week in a row, down 2.7% since July 24th.
Nevertheless, the annual high mass of central bankers in Jackson Hole will likely draw investors’ attention away from Trump’s political troubles. As usual, the US and EU central banks will be the biggest player at the table. However, this year is quite different as both of them made clear they are willing to move further toward tightening. The Fed has been delaying the announcement of the starting date of its balance sheet run-off for several months, while the ECB has been reluctant to give further information regarding tapering. Moreover, both institutions are facing growing unease as inflation levels have decelerated in the USA and the euro zone. The market is therefore eager to get clarity on this specific topic. The central bank policy forum on Thursday will be the key event of the week with Janet Yellen as main guest.
The US dollar has been trading mostly sideways on Monday even though it rose 0.15% against the single currency, 0.25% against the Swissie and 0.14% against the Aussie. Only the Japanese yen was able to extend gains, rising 0.10%. We expect appetite for the USD to remain weak ahead of Yellen’s speech, especially against the backdrop strong divergence among Fed members and lacklustre inflation data.
SNB: Domestic sight deposits decline
Today has been released the Swiss domestic sight deposits which has declined to CHF 470.3billion from CHF 476.3 billion while the EURCHF is pushing higher and is now consolidating around 1.1350CHF for one single euro note. We start seeing the sight deposits growth slowing down. The FX reserves has largely increased in July as the CHF was weakening. We consider that for the time being the SNB does not need to intervene as much as it intervened in the past.
The CHF appreciation is providing the Swiss central bank with some relief. Yet, we consider that the CHF is still significantly overvalued. The main driver is still the single currency and in September, the ECB meeting will be key. There are room for disappointment as markets expect the European central bank to start further tightening by reducing the asset purchase program. On the contrary we believe that the European institution will show further cautiousness and that downside pressures on the EURCHF pair are likely.
On top of that the Greek issue is not sustainable. Fitch upgraded this weekend the debt rating to B- from CCC with a positive outlook. This contributes to drive in the short-run the euro higher as markets will price in the possibility of further upgrade. We recall that the charge of the Greek debt is not sustainable in the long run and will send money flowing back in Switzerland. Any appreciation of the EURCHF should pave the way for reloading short euro positions.
