EUR/CHF Tests 1.0638, EU CPI Surges

News and Events:

EUR/CHF dips lower

EUR/CHF has been under constant pressure over the last few weeks as it tested continuously the 1.07 threshold that is broadly considered as the SNB’s implicit floor of 1.07. The market is getting ready for a tough year in the Euro area as the Brexit story together with ongoing and upcoming elections (Dutch national elections, French presidential and parliamentary elections and German federal election). However, the pressure has increased another notch yesterday as the euro dip to 1.0638 against the Swiss franc, the lowest level since the Brexit vote when the currency pair hit 1.0624.

We however think it a bit early to ring the alarm bell and call for the failure of the SNB’s FX intervention program. Indeed, the Swiss franc had to face some unexpected market conditions recently. First, the takeover of Swiss company Actelion by Johnson & Johnson created some disturbance, even though most the $280-a-share price will be paid in dollar. However, small shareholders will a possibility to get paid in CHF. Second, yesterday sell-off in worldwide equity markets are reduce investors’ risk appetite and triggered a slight risk-off move in favour of safe-haven currencies such as the CHF and JPY. We believe that there is no reason to worry yet as the SNB is still committed to defend the Swiss franc, it however means that the central bank is now more tolerant with respect to CHF strength.

BoJ bets on Trump

The Bank of Japan has left its policy balance rate unchanged at -0.1% in line with market expectations. The Japanese central bank will continue targeting 0% on the 10-year government bond.

The BoJ has clearly been in "wait and see mode" since Trump’s election. Indeed, there are hopes that the new US president will spark better economic conditions which could in the end help Japan and increase inflationary pressures.

Donald Trump has stated over the past week that the greenback may be too strong. This supports our view that the yen should weaken in the medium term even though it is far too early to assess the future efficiency of Trump’s policies.

Inflation expectations have not changed following the meeting and it is still expected to come in at 1.5% by March 2018 – below the BoJ target of 2%.

One should not forget that even if Trump is at the centre of the markets’ attention, there are also downside risks in Europe that could offset Japanese inflationary pressures. Europe’s political outlook appears more and more uncertain, especially given the upcoming French and German elections which may provide plenty of surprises. The market’s fear of a nationalist party win could drive investors back to safe haven, causing further yen appreciation.

European inflation to grind higher

A big day is in store for European economic data and potentially for the single currency. Euro area preliminary Q4 GDP is expected to rise to 0.5% q/q from 0.3% q/q prior read, while the annual headline CPI estimate is expected to surge to 1.5% from 1.1% prior read. French CPI was released earlier coming in at 1.4% y/y against an expected 1.1% y/y indicating that an upside surprise in the Euro area read is probable. Overall, the Euro-area economy has clearly preserved its solid growth momentum. This improvement in the European outlook might catch many off guard as investors have been singularly focused on US President Trump’s first week and the latest Brexit developments. However, as inflation grinds towards the ECB 2% target range we need to consider adjusting the central bank’s current ultra-accommodating policy. Given that the ECB has forecasted strong growth, today’s read is unlikely to panic Draghi, however, higher sustainable inflation will eventually lead to tighter monetary policy. We suspect that the Trump pro-growth story and worries over the European political environment have clouded investors to the fact that Europe inflation is rising. Currently, FX markets are underpricing the risk of a sharp shift in ECB policy, quickly unwinding the USD dominant trade.

Today’s Key Issues (time in GMT):

• Dec Unemployment Rate Gross Rate, exp 4,30%, last 4,20% DKK / 08:00
• Dec Unemployment Rate SA, exp 3,40%, last 3,40% DKK / 08:00
• Dec Foreign Tourist Arrivals YoY, last -21,40% TRY / 08:00
• Jan P CPI YoY, exp 2,40%, last 1,60% EUR / 08:00
• Jan P CPI MoM, exp -1,10%, last 0,60% EUR / 08:00
• Jan P CPI EU Harmonised MoM, exp -1,60%, last 0,50% EUR / 08:00
• Jan P CPI EU Harmonised YoY, exp 2,20%, last 1,40% EUR / 08:00
• ECB’s Mario Draghi Speaks in Frankfurt EUR / 08:00
• Jan Unemployment Change (000’s), exp -5k, last -17k, rev -20k EUR / 08:55
• Jan Unemployment Claims Rate SA, exp 6,00%, last 6,00% EUR / 08:55
• Nov Current Account Balance, last 2.0b EUR / 09:00
• Feb Norges Bank Daily FX Purchases, exp -1000m, last -1000m NOK / 09:00
• Dec P Unemployment Rate, exp 11,80%, last 11,90%, rev 12,00% EUR / 09:00
• Dec Net Lending Sec. on Dwellings, exp 3.2b, last 3.2b, rev 3.1b GBP / 09:30
• Dec Mortgage Approvals, exp 69.2k, last 67.5k GBP / 09:30
• Dec Money Supply M4 MoM, last 0,40% GBP / 09:30
• Dec M4 Money Supply YoY, last 6,40% GBP / 09:30
• Dec M4 Ex IOFCs 3M Annualised, last 4,20%, rev 4,60% GBP / 09:30
• Dec Unemployment Rate, exp 9,80%, last 9,80%, rev 9,70% EUR / 10:00
• 4Q A GDP SA QoQ, exp 0,50%, last 0,30%, rev 0,40% EUR / 10:00
• 4Q A GDP SA YoY, exp 1,70%, last 1,70%, rev 1,80% EUR / 10:00
• Jan CPI Estimate YoY, exp 1,50%, last 1,10% EUR / 10:00
• Jan A CPI Core YoY, exp 0,90%, last 0,90% EUR / 10:00
• Dec PPI MoM, last -0,20% EUR / 10:00
• Dec PPI YoY, last -0,30% EUR / 10:00
• Dec National Unemployment Rate, exp 11,90%, last 11,90% BRL / 11:00
• Dec Fiscal Deficit INR Crore, last 34489 INR / 11:00
• Dec PPI Manufacturing MoM, last 0,73% BRL / 11:00
• Dec PPI Manufacturing YoY, last -0,12% BRL / 11:00
• Dec Trade Balance Rand, exp 6.3b, last -1.1b ZAR / 12:00
• 2016 GDP Annual Estimate YoY, last 7,10% INR / 12:00
• ECB’s Yves Mersch Speaks in Frankfurt EUR / 12:15
• Dec Net Debt % GDP, exp 45,80%, last 43,80% BRL / 12:30
• Dec Nominal Budget Balance, exp -105.2b, last -80.4b BRL / 12:30
• Dec Primary Budget Balance, exp -72.8b, last -39.1b BRL / 12:30
• 4Q Employment Cost Index, exp 0,60%, last 0,60% USD / 13:30
• Nov GDP MoM, exp 0,30%, last -0,30% CAD / 13:30
• Nov GDP YoY, exp 1,40%, last 1,50% CAD / 13:30
• Dec Industrial Product Price MoM, exp 0,50%, last 0,30% CAD / 13:30
• Dec Raw Materials Price Index MoM, exp 2,80%, last -2,00% CAD / 13:30
• Nov S&P CoreLogic CS 20-City MoM SA, exp 0,70%, last 0,63% USD / 14:00
• Nov S&P CoreLogic CS 20-City YoY NSA, exp 5,00%, last 5,10% USD / 14:00
• Nov S&P CoreLogic CS 20-City NSA Index, last 191,79 USD / 14:00
• Nov S&P CoreLogic CS US HPI YoY NSA, last 5,61% USD / 14:00
• Nov S&P CoreLogic CS US HPI NSA Index, last 185,06 USD / 14:00
• ECB’s Benoit Coeure Speaks in Frankfurt EUR / 14:3
• Jan Chicago Purchasing Manager, exp 55, last 54,6, rev 53,9 USD / 14:45
• Jan Conf. Board Consumer Confidence, exp 112,8, last 113,7 USD / 15:00
• Jan Conf. Board Present Situation, last 126,1 USD / 15:00
• Jan Conf. Board Expectations, last 105,5 USD / 15:00
• Jan QV House Prices YoY, last 12,50% NZD / 16:00
• 4Q Unemployment Rate, exp 4,80%, last 4,90% NZD / 21:45
• 4Q Employment Change QoQ, exp 0,70%, last 1,40% NZD / 21:45
• 4Q Employment Change YoY, exp 6,10%, last 6,10% NZD / 21:45
• 4Q Participation Rate, exp 70,20%, last 70,10% NZD / 21:45
• 4Q Pvt Wages Ex Overtime QoQ, exp 0,50%, last 0,40% NZD / 21:45
• 4Q Pvt Wages Inc Overtime QoQ, exp 0,50%, last 0,40% NZD / 21:45
• 4Q Average Hourly Earnings QoQ, exp 0,60%, last 0,30% NZD / 21:45
• Bank of Canada’s Poloz speaks at University of Alberta CAD / 22:20
• Jan AiG Perf of Mfg Index, last 55,4 AUD / 22:30

The Risk Today:

EUR/USD’s momentum is now trading sideways. Hourly resistance area is given at around 1.0800. Hourly support lies at 1.0590 (19/01/2016 low) and 1.0341 (03/01/2017 low). Expected to see continued 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 on the road towards 1.2771 (05/10/2016 high). The technical structure is still anyway showing positive potential. Hourly support is given at 1.2466 (30/01/2016 low). Expected to show further bullish move. 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 has surprisingly exited the downtrend channel after monitoring resistance implied by the upper bound. Yet, the pair is back within it. Hourly resistance is given at 115.62 (19/01/2016 high) while a break of hourly support given at 112.57 (17/01/2017 low) is needed to confirm further downside moves. 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 momentum is bearish. Yet, the selling pressures are being reduced below parity. Key resistance is given at a distance at 1.0344 (15/12/2016 high). The road is nonetheless wide-open for further decline. 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.