SNB Publishes Annual Report, RBNZ Stands Pat

News and Events:

RBNZ is willing to tolerate higher inflation for a weaker Kiwi

As widely expected, the Reserve Bank of New Zealand kept its Official Cash Rate target unchanged at a record low of 1.75. Also, Graeme Wheeler did not change his view on the overvaluation of the Kiwi, instead repeating the need for a weaker Kiwi ‘to achieve more balanced growth’. He also allayed fears concerning rising inflationary pressure, arguing that the spike was temporary, stemming from a temporary rise in commodity prices.

Overall, the tone of the statement suggests that the RBNZ is ready to tolerate higher inflation in order to allow for a weaker Kiwi. This may be a good decision especially as core inflation has picked up at a slower pace than headline inflation. However, we are having a hard time believing that the market will collaborate. Indeed, the Kiwi has been one of the worst performing currencies among the commodity complex (+1.8% against the USD), especially against the Australian dollar (+6% versus the USD). We think that the Kiwi has room for further appreciation, especially against the Aussie. AUD/NZK has already fallen 1.6% since mid-March and is now heading towards the next key support area at between 1.08-07(psychological level and Fibo 38.2% on December-March rally).

SNB releases its annual report

In the latest annual report from the SNB, we have learned that the Swiss central bank bought around CHF67 billion in foreign currencies in order to defend the franc. Comparatively, this is lower than in 2015 when the floor was removed.

The SNB still sees the franc as ‘significantly overvalued’ and so the negative interest rate policy is more relevant than ever. However, for now, the central bank is sticking to its wait-and-see approach.

Europe’s political uncertainties are weighing heavily on the EURCHF and we believe that bearish pressure shows no signs of easing. In terms of Swiss data, inflation has never been so high at 0.6% y/y and the unemployment rate remains moderate at 3.6%. Exports are a little more concerning with two consecutive declines in January and February (respectively -4% and -2.2%). In the short and medium-term, the Swiss Franc should remain below 1.0800 and the SNB is likely to intervene to avoid extreme strengthening. Finally, despite massive QEs, we believe that the ECB is likely to soon enter a tightening cycle – to reduce monetary policy divergence with the US – which in turn will definitely benefit the Swiss economy.

Obamacare repeal bill: Defeat or Delay?

Judging from the thin, directionless flows in Asia, investors will have to wait for the outcome of today’s vote on the Obamacare repeal bill for the market’s next move. So far, the market has hyped this event as being a test of US President Trump’s policy agenda, suggesting that a defeated healthcare bill would translate into barriers for the much-awaited tax reform policy and broader pro-growth agenda. As suggested in yesterday’s report, we concur that short-term volatility will be driven by the result of this afternoon’s vote. With the Republican opposition needing less than 22 members to vote against the measure (reports suggest that 24 members are prepared to obstruct), we believe that the bill will be rejected (if the bill reaches the floor and is not delayed).

Interestingly, Republican conservatives are already shifting the blame away from President Trump to Speaker of the House, Paul Ryan. However, regardless of the outcome, Fed monetary policy will provide investors with a clear directional view. The weaker dollar has created looser conditions, while political uncertainty has forced investors to fade expectations due to the steeper Fed policy path (June hike is now 50/50). Amid falls in real yields and signs that the Fed will be willing to tolerate higher inflation to ensure growth is stable, risky asset should continue to outperform. Today, Fed Chair Yellen will provide additional insight into monetary policy strategy. We expect that she will reaffirm the central bank’s slow and steady approach to tightening, decelerating the economy without spooking financial conditions. Given this outlook, we maintain our stance that further risk accumulations will favour EM currencies (ZAR, ILS, PLN and INR long continue to build).

Today’s Key Issues (time in GMT):

• Mar Consumer Confidence Indicator, exp 5, last 4,8 DKK / 08:00
• ECB’s Nouy speaks in Brussels EUR / 08:00
• ECB Publishes Economic Bulletin EUR / 09:00
• BOE Deputy Governor Ben Broadbent Speaks in London GBP / 09:00
• Feb Retail Sales Ex Auto Fuel MoM, exp 0,30%, last -0,20%, rev -0,30% GBP / 09:30
• Feb Retail Sales Ex Auto Fuel YoY, exp 3,20%, last 2,60%, rev 2,10% GBP / 09:30
• Feb Retail Sales Inc Auto Fuel MoM, exp 0,40%, last -0,30%, rev -0,50% GBP / 09:30
• Feb Retail Sales Inc Auto Fuel YoY, exp 2,60%, last 1,50%, rev 1,00% GBP / 09:30
• mars.23 ECB Targeted LTRO Total Amount, exp EU110.00b, last EU62.16b EUR / 10:20
• mars.22 FGV CPI IPC-S, exp 0,38%, last 0,35% BRL / 11:00
• Mar CBI Retailing Reported Sales, exp 4, last 9 GBP / 11:00
• Mar CBI Total Dist. Reported Sales, exp 20, last 25 GBP / 11:00
• mars.17 Foreigners Net Bond Invest, last $354m TRY / 11:30
• mars.17 Foreigners Net Stock Invest, last -$94m TRY / 11:30
• Revisions: Initial Jobless Claims USD / 12:30
• mars.18 Initial Jobless Claims, exp 240k, last 241k USD / 12:30
• mars.11 Continuing Claims, exp 2040k, last 2030k USD / 12:30
• Fed’s Yellen Speaks at Community Development Conference USD / 12:45
• mars.17 Gold and Forex Reserve, last 391.4b RUB / 13:00
• mars.19 Bloomberg Consumer Comfort, last 51 USD / 13:45
• Feb New Home Sales, exp 564k, last 555k USD / 14:00
• Feb New Home Sales MoM, exp 1,60%, last 3,70% USD / 14:00
• ECB’s Lautenschlaeger Speaks at Vienna Conference EUR / 14:45
• Mar Kansas City Fed Manf. Activity, exp 14, last 14 USD / 15:00
• Mar A Consumer Confidence, exp -5,9, last -6,2 EUR / 15:00
• Fed’s Kashkari Speaks on U.S. Education Outcomes in D.C. USD / 17:00
• SNB’s Maechler Speaks in Zurich CHF / 17:00
• Mar Consumer Confidence, last 94,4 KRW / 21:00
• Feb Trade Balance NZD, exp 180m, last -285m NZD / 21:45
• Feb Exports NZD, exp 4.20b, last 3.91b NZD / 21:45
• Feb Imports NZD, exp 3.99b, last 4.19b NZD / 21:45
• Feb Trade Balance 12 Mth YTD NZD, exp -3655m, last -3468m NZD / 21:45
• 4Q BoP Current Account Balance, exp -$12.00b, last -$3.40b INR / 22:00

The Risk Today:

EUR/USD keeps on pushing higher, even though the pair is now pausing around 1.0800. A break of the upside channel would signal persistent buying pressures. Key resistance is given at a distance 1.0874 (08/12/2017 high). Strong support can be found at 1.0493 (22/02/2017 low). The technical structure suggests deeper increase towards resistance at 1.0874. 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 has broken bearish downtrend channel. The pair has broken resistance at 1.2429 and there are rooms for further strength. Hourly resistance is located at 1.2570 (24/02/2017 high). Hourly support is given at 1.2324 (03/17/2017 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 has failed to break key resistance given at 115.62 (19/01/2016 high) confirming persistent selling pressures. The pair has broken strong support at 111.36 (28/11/2016 low). Hourly resistance can be located at 113.57 (16/03/2017 high). 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 is declining. Hourly support is given at 0.9862 (31/01/2017 low). Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to show continued weakness. 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.