EUR/CHF stabilizes at around 1.1540 as USD consolidates
EUR/CHF came under renewed selling pressure yesterday in the late afternoon as it slid from 1.1637 to 1.1554 before consolidating at around 1.1570. It has been a bad start into the year for the Swiss National Bank as, since mid-January, the Swiss franc has been strengthening against all G10 currency – with the exception of the pound sterling. The Franc rose 3% against the greenback, 2.25% against the Aussie, 2.20% against the yen and, most importantly, 1.55% against the single currency.
Against the backdrop of rising global interest rates, especially in the US and EU, this is somewhat surprising as Swiss rates have rose only moderately compared to them. The 5-year interest rate differential between Germany and Switzerland jumped to 46bps, while the 10-year spread returned to 25bps. However, as usual with the Swiss franc, fundamentals are not the main drivers, answers may lie somewhere else.
First, the current backslash against the greenback – the USD TWI (trade-weighted index) fell to its lowest level since December 2014 – has triggered renewed interest for safe-haven assets such as the CHF, JPY and obviously Gold. Secondly, there have rumours about the eventuality of the SNB tightening its monetary policy. In our opinion, the SNB won’t move an inch before the ECB starts tightening, Thomas Jordan has absolutely no upside to do such a move as it would trigger a CHF rally and ruined several years of efforts.
Globally, we expect the USD to make its comeback within the next few weeks, which should release the pressure on the Swiss franc. Indeed, much of the EUR/CHF turmoil was the result the US dollar sell-off, rather than a EUR appreciation. EUR/USD has remained stable over the last seven days, while USD/CHF lost some ground.
Chinese Manufacturing PMI progresses, though weaker than expected
Chinese economy has proven itself robust last month. Showing signs of continuous progression in manufacturing production following Chinese New Year, Chinese January PMI was at 51.3, slightly weaker than December (51.6), essentially caused by Peking’s government initiative to reduce polluting industries (e.g. heavy and manufacturing industries) and reducing shadow banking across the country.
Chinese December 2017 Y/Y Exports and Imports of 10.90% (9.10% consensus) and 4.50% (13% consensus) respectively also confirm our view that Chinese strong economic growth in 2017 will certainly be slower in 2018, though more vigorous than expected. With a Q4 GDP Y/Y of 6.80% (6.80% – 6.90% range maintained since April 2017), we remain confident that China will maintain this pace for 2018 (around 6.70% – 6.80%). Other economic data such as December CPI Y/Y at 1.80%, December Retail Sales Y/Y at 9.40% remain conclusive for a good year in China in 2018
