Swiss FX reserves hit record level
(Arnaud Masset, market analyst)
The foreign exchange reserves of the Swiss National Bank rose by CHF 17.6 billion in November to CHF 648 billion, setting a new record. During the month of October, the variation was more subdued as it increased by CHF 2.4 billion to CHF 630.4 billion. In spite of the solid increase in reserves, it is hard to assess the actual size of the SNB intervention - even though domestic sight deposits within the central bank increased by roughly CHF 11bn in November - due to valuation effects. Indeed, in November, the Swiss franc fell roughly 2.5% against the US dollar, 5% against the pound sterling but rose 0.80% against the single currency. Excluding the valuation effect, we estimate that the reserves increased by roughly CHF 10bn in November, suggesting that SNB was indeed active in the FX market to stabilise the Swiss franc. The period around the US elections has seen some sharp movements in the FX markets which has increased investor propensity to seek safe haven assets. More specifically, the mounting political uncertainty in the Eurozone, which will remain the main driver for 2017, will keep the SNB on its toes.
Scope for EURUSD rally
(Peter Rosenstreich, head of market strategy)
Without a catalyst USD is having a hard time moving higher. US front end yields are now moving sideways as most of the Fed tightening for 2017 is already priced in. Watch USD rally to shift into a range with a skew towards weakness in the next two months (prior to Jan 20th). In addition, volatility is generally declining, suggesting that trading high yields and beta EM currencies, against USD remains attractive.
Today European and German industrial production will be released: Yesterday’s strong order suggests an upside risk to 0.6% m/m forecast. This is further indication that outside of political risk European economic recovery remains healthy. This increases the probability that at the ECB meeting Draghi will begin discussing policy without QE. Any hint of the ECB pivoting towards normalization will give EUR a boost.
Optics Matter, Buy CNY?
(Peter Rosenstreich, head of market strategy)
Today's release of China FX reserve should indicate approx. 40-$60bn outflows as expectations of USD strength grows and the war of words between Trump and China heat up. Yet despite the fall USDCNY fix has been weaker suggesting that the PBoC is involved. We suspect the China central bank has been intervening to dissuade outflows through micro adjustment including pushing up offshore borrowing rates. Heading into the US Presidential inauguration and expectation for Trump to label China a currency manipulator we anticipate that the PBoC will hold USDCNY stable or we may even see a slight depreciation in order to provide the appearance of fairness.
GBP upside
(Peter Rosenstreich, head of market strategy)
The complexity of Brexit remains a stumbling block for the UK and will continue to generate rogue sources of volatility. However quietly in the backdrop the UK remains strong. Expectations for a contraction in consumer spending due to a decrease in GBP buying power has not materialized, nor direr predictions. We would buy GBP on drips on the domestic story and on the back of growing expectations of a "soft”, "one foot in one foot out" Brexit.