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Fed meeting likely to be a non-event, Watch for further CHF appreciation, China is showing, at best, some signs of stabilization

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Fed meeting likely to be a non-event

(Arnaud Masset, market analyst)

The Federal Open Market Committee kicked-off its two-day monetary policy meeting yesterday and will announce any modifications later today. There is no doubt that the Federal Reserve will leave its benchmark rates unchanged after lifting them by one notch at the December meeting. Instead, the market will focus on the Fed’s assessment of the potential direct and indirect effects of Donald Trump’s presidency on the economy. The January meeting is a light one, meaning that there will be no new economic forecasts or a press conference, just a statement.

Given the highly uncertain environment that has emerged since the investiture of Trump, and the rain of executive orders that has ensued, we expect that the Fed will play for time and avoid giving any strong signals. Moreover, the recent relatively disappointing economic data from the US (GDP, durable goods orders…) has eased the pressure on the Fed, which would translate into a less aggressive pace of tightening for the year ahead. Indeed, we remain sceptical that the Fed will be able to hike rates three times this year.

In the FX market, the US dollar took another hit on Tuesday as investors start to really wonder whether a Trump presidency will be in any way positive for businesses in general. The dollar index slid 0.85% yesterday and is currently struggling to reverse the negative momentum. We continue to expect further dollar weakness in the short-term as the November-December rally was exclusively driven by speculation. However, the growing risk-off sentiment will slow down the dollar sell-off as investors take shelter from the uncertainty stemming from Trump's political style.

Watch for further CHF appreciation

(Peter Rosenstreich, head of market strategy)

Swiss PMI manufacturing came in slightly below expectations at 54.6 against 55.9 exp (56.2 prior read). Declines could be seen in output and order backlogs but none of these were significantly troublesome or enlightening. Overall, the Swiss economy continues to hum along at a decent pace despite the strong currency and late winter.

Yet the sleepless nights continue for the Alpine economy as the SNB battles to manage the negative effects of an overvalued currency. J&J's purchase of Actelion has caused EURCHF to drop below 1.07 on the back of speculation of massive demand for CHF (Although as my colleague Arnaud Masset points out, it is unlikely that all $30bn will be converted).

Europe’s political outlook is becoming significantly more unstable as accusations mount against French presidential hopeful, Fillon. This has caused an uptick in migrations into the safe haven swissie. Meanwhile stateside, US President Trump’s focus on perceived currency manipulators has temporarily shifted from China to German and Japan, suggesting that it is only a matter of time before the SNB's exchange rate policy also comes under scrutiny.

We continue to see further downside risk in EURCHF as macro headwinds increase and the SNB continues to allow great exchange rate flexibility as the inflation outlook improves. We anticipate a bearish extension back towards 1.0623 support. In USDCHF the break of key 61% Fib retracement lvl and 200D MA indicates further bearish pressure towards 0.9537.

China is showing, at best, some signs of stabilization

(Yann Quelenn, market analyst)

China’s outlook has the full attention of world markets. Last night saw the release of important economic data, including manufacturing PMI which came in higher than expectations at 51.3 in January versus 51.4 in December. As we know, a figure above 50 indicates expansion. This marks the sixth straight month of expansion.

It is true that the housing boom has boosted demand for manufacturing products as new buildings are on the rise. Industrial firms selling raw materials have also enjoyed an upsurge in profits as commodity prices show some solid potential lately. Nonetheless, as the manufacturing PMI approaches the 50-mark, some fundamentals are beginning to cause fears - mainly that the housing market is on the decline.

In addition, we are currently concerned that China’s fiscal deficit, which widened in 2016 will continue to do so in 2017. The PBoC has injected a lot of liquidity into the banking system through its MLF tool (medium-term lending facility) and this may cause issues at some point, particularly as it can drive downside pressures on inflation. We firmly believe that strong economic risks are ahead for China. We remain bullish on the pair USDCNY towards 7 in the medium-term.

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Source: https://en.swissquote.com/fx/news
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