RBA maintains its wait-and-see approach
The US dollar extended gains against all of G10 currencies on Tuesday. The gains were quite limited as investors awaited several key speeches today. Draghi will speak at GMT 9 am, while across the Atlantic Poloz (BoC) will give a press conference this evening. In Australia, the central bank (RBA) held the Cash Rate Target unchanged at record low 1.5%. Governor Lowe made few changes to the statement and maintained its growth forecast of around 3% over the few next year. The RBA also expressed its concerns about the weakness in inflation (CPI eased to 1.8%y/y in the third quarter, down from 1.9% in the previous one) and reiterated its warning that further strength of the Aussie could only worsen the situation.
The Reserve Bank of Australia finds itself in a tricky place, as the economy kept improving and reducing its dependence to the mining sector, while on the other hand a few indicators such as inflation and retail sales are sending mixed signals. The RBA will wait patiently on the sidelines for a long-time. The market is not pricing any rate hike before at least the end of the summer 2018. Against such a backdrop, the risk is significantly skewed to the downside in AUD/USD. However, upside risk is not zero as an positive surprise in inflation together with another disappointment regarding Trump tax plan could trigger an AUD rally.
AUD/USD is currently testing the key 0.76-0.77 area and has been unable to validate a break of the $0.77 resistance (200dma). The USD rally is losing steam amid a lack of positive news in the US. Therefore, a return towards $0.78 appears likely in the short-term. In the longer-term, we maintain our bearish view.
Political risk rise in Europe
Political risk have again picked up in Europe prompting a stark sell of in Euro. In Italy the center-right coalition led by former Italian Prime Minister Berlusconi solidly won regionals elections in Sicily. With over 90% of the ballot counted, Nello Musumeci took 40% of the vote over 5-Star candidate Giancarlo Cancelleri impressive 35%. The elections was viewed by many as a litmus test for next year’s Italian national elections. The turnout for both antiestablishment parties’ indicates the reactionary vote remain influential. EURUSD bearish momentum continues hitting 1.1566 low.
Clearly the concern is fragmentation of the EU as Italians in poll have shown the highest dislike and preference to leave the EU of any member nation. However, a portion of the move should be attributed to broader FX risk aversion (migrating into USD), while equities continue to power ahead. Yet our midterm view this that European Union convergence has move past the “event horizon”. This unified union will be able to keep Italy in folds and therefore we would fade short-term risk volatility. This view, will be reinforced by further strengthening in the European economy. German Industrial production fell 1.6% in September greater then markets expectations of 0.9%. The slowdown can be attributed to broader weakness in European leading indicators after significant acceleration. We suspect the weak read will be short lived an ECB loose monetary policy and solid outlook for global economy will support output growth.
Switzerland FX Reserves hit record high
This morning has been released the Swiss FX reserves for October. The data increased strongly to $741.5 billion from $724.4billion. The reserves hit a clear record high.
The SNB balance sheet continues to expands, meaning that the SNB still believes the CHF is overvalued, or at least that upside risks on the CHF are strong. The FX reserves are coming from money creation in other words the central bank’s debt. It is clear that as long as global monetary policy remains loose, the Swiss FX reserves will continue climbing and increase the SNB exposure to global economic conditions.
The EURCHF is below 1.16 and the EUR remains the main driver. The strong Quantitative easing from the European Central Bank continues at least until September 2018 and this is still posing threat to the Swiss stability. The inflation, that seems to be back in the US, has slowed unexpectedly in Europe in October preventing a bigger change of the ECB monetary policy. A stronger European inflation would definitely help to clear some pressures off the CHF.
