Switzerland: Unemployment rate increases
(Yann Quelenn, market analyst)
New Swiss labour data was released this morning. The unemployment rate has increased to 3.7% from 3.5% in January. The data is now at 11-month high and this month’s rise is also the biggest one in a year.
As a result, if the unemployment rate increases, downside pressures on the inflation should also continue and putting the efficiency of the SNB’s monetary policy at stake. It is clear that the SNB is doing its best to maintain an exchange rate of around 1.0700 CHF for a single euro. Stimulating inflation is going to become more and more difficult.
The conditions for Swiss corporates are becoming extremely difficult. In particular when looking at the cost of labour in Europe. This is why the unemployment rate should continue to grow as companies, in order to face market competition, will try, as much as possible, to push productivity. At some point, the difference in labour cost between Switzerland and its neighbours is too significant to be sustainable over the long haul.
Currency-wise, the EURCHF pair lies below 1.0700 and while the inflation remains flat, the franc should remain strong over the medium-term. We remain bearish on the pair.
NZD/USD tumbles as RBNZ delays tightening
(Arnaud Masset, market analyst)
As widely expected the Reserve Bank of New Zealand left its official cash rate unchanged at 1.75% and surprisingly changed the tone of the forward guidance. Indeed, Governor Graeme Wheeler, who is expected to step down at the end of the third quarter, baffled investors by further delaying any tightening move. The announcement had a substantial impact on the New Zealand Dollar as it fell as much as 1.60% against the greenback, down to 0.7192 before consolidating above the 0.72 threshold after bouncing back on the 0.7196 support level (Fibonacci 61.8% on November-December debasement).
The RBNZ’s decision could be confusing, especially against the backdrop of improving inflationary outlook. However, we think the RBNZ is betting on the Fed having to hike rates to control rising inflation pressures caused by the “Trumponomic” effect. In such a scenario, tighter monetary policy in the US would cause the USD to strengthen, which would ultimately allow the NZD to weaken. In addition, the central bank cannot take the risk of starting to tighten too soon as there is no guarantee Trump will be able to deliver on any of its economic promises. We expect the NZD rally to run out of steam; however NZD/USD will remain highly sensitive to any political development in the US as the high yielding currency will again attract investors should Trump disappoint.
Banxico on the hot seat
(Peter Rosenstreich, head of market research)
In Mexico today strong January inflation data should be the shove Banxico needs to increase policy rates by 50bp. Annual inflation is expected to climb to 4.71% from 3.36. Unfortunately the hawkish move is geared to address the weaker peso (although selling pressure has abated in recent weeks) rather than accelerating growth outlook. In fact, the politically driven uncertainty has materially deteriorated economic forecasts. US President Trump’s recent comments alluding to sending US troops south of the boarder and Mexican President Nieto cancelling his scheduled trip to Washington only highlight the increasing friction between the two nations. The Mexican MoF provided the final data on public finance for 2016 reporting a deficit of 2.9% of GDP. The outlook was already difficult with oil revenues falling, slowing domestic growth and a strap fiscal budget unlikely to support new growth (rather pay increasing pension expansion) - factoring in the Trump risks only limits upside expectations. Yet, ultimately MXN has been driven less by fundamental weakness but rather political pressure. Barring an escalation, with real actions, higher yields in MXN and a lower probability of a currency collapse will inspire the closing of speculative shorts. The Banxico hike should also further support the MXN rally.