Further upside in USD/CHF
Switzerland Manufacturing PMI came in at 62.0 from 61.7 and 0.7 higher than expectations. This continued a strong trend of economic improvement in manufacturing reaching the highest level since 2011. Last week Kof leading indicators jumped to 109.1 from 105.8. With a weaker CHF and further improvement in global demand Switzerland is uniquely positioning to exploit the opportunity. This fact is clearly reflecting in the increased upside surprises. Interestingly and quietly consumer price inflations has been slowly creeping higher as annual headline read stands at 0.7%.
Should the current inflation trajectory continue prices should hit the SNB 2% target in early 2019. While a year away with Swiss GDP growth outlook improving above 0.9% 2017 trend, the central bank will be faced with interesting policy choices in 2018. Yet in the current environment, CHF remains a solid short against USD and EM currencies. Accelerating outflows and dropping FX hedge ratios will further weaken the CHF. But the key of an unmoving SNB unlikely to unwind reserves of adjust policy rates higher until CHF become less “overvalued” is the primary reason investors will shift out of CHF. We remain constructive on USDCHF expecting current bullish trend will extend to 1.02.
High expectations for the US ADP data before the FOMC meeting
Today we get US labor ADP data ahead of the NFP report on Friday. Bloomberg Survey indicates new jobs creation for October of 200k compared to the prior September read of 135k. The overall sentiment is positive and it has been 7 years that the data print positive. The third quarter GDP has been released earlier last week at 3% q/q. Anyway it is worth saying that before this release GDP growth was in its second-worst year since 1959. On top of that credit demand is contracting which should weigh on growth and tax receipts remain negative.
This is why traders will clearly have the downside risks in the back of their minds. ADP has had a history of spectacular misses for predicting NFPs over the past months. Last time ADP predicted 135 new jobs while NFPs came in negative. Yet, statistically speaking, ADP has more often been a pretty accurate forecast for the NFP change.
Tonight will be held the FOMC meeting against the backdrop of the coming nomination of the new Fed Chair that will replace Janet Yellen early next year. Markets now expect a rate hike in
December. It is currently priced in at 66.8%. We suspect that ADP is likely to print below the current expectations following September NFPs. A poor labor read will keep adding downside pressures on the greenback lower, and fuel the main country equity indexes as a US weak economy will push away Fed rate-tightening policy discussion. We think that the room is open for short-term weakness on the dollar.
