- USD continues to lose ground against most currencies as the boost provided by Fischer’s hawkish comments fades away
- Commodity currencies surged the most against the greenback - with the exception of the Norwegian krone - in spite of another sell-off in crude oil
- Renewed Fed rate hike expectations over the last week have prevented the Kiwi from moving higher
- JPY: May extend gains against the dollar with USD/JPY testing the 100 support area for the last seven days as the market anticipates that the BoJ will not allow the yen to strengthen further
- The market is already starting to price further monetary easing from the BoJ as indicated by the sharp increase in risk reversal measures
- Today’s Swiss watch exports report indicated a significant decline of 14.2% y/y for July
- The reason why demand is being pushed lower is largely due to an overvalued franc, which is unfortunate for manufacturers as we will not see any pick-up in demand as long as the currency remains so strong
-There will be increasing calls for the SNB to defend the CHF despite the fact that the Swiss central bank is already running out of options
The US dollar continued to lose ground against most currencies as the boost provided by Fischer’s hawkish comments fades away. US treasury yields were moving sharply lower with monetary policy sensitive 2-year yields hitting 0.74% this morning, down from 0.78% in the early trading session on Monday. Commodity currencies surged the most against the greenback - with the exception of the Norwegian krone, which traded sideways in Tokyo - in spite of another sell-off in crude oil. The West Texas Intermediate was down another 1% at $47 on Tuesday after falling more than 3% the previous day as investors struggled to find a good reason to lift prices higher. From a technical standpoint, the 50dma - currently at $45.47 - will act as support. The following one can be found at around $40 (low from early August).
The New Zealand dollar was the best performer in overnight trading as it surged 0.78% against the greenback to 0.7325, the highest level since August 10th. This is the fourth time since mid-August that the currency pair has tested the 0.7335-0.7350 resistance area and failed. Indeed, renewed Fed rate hike expectations over the last week have prevented the Kiwi from moving higher.
In Japan, the yen extended gains against the dollar with USD/JPY falling 0.30%, down to 100.08. The currency has been testing the 100 support area for the last seven days as the market anticipates that the BoJ will not allow the yen to strengthen further. On the data front, Japan’s flash manufacturing PMI rose to 49.6 in August compared to 49.3 and 51.7 a year ago. In spite of the improving trend since May this is the sixth straight month of contraction. The market is already starting to price further monetary easing from the BoJ as indicated by the sharp increase in risk reversal measures. Indeed, 1-month 25 delta risk reversal in USD/JPY bounced to -0.98% compared to roughly -2% last week. 1-month at-the-money implied volatility reached 14.40% from less than 10% at mid-August.
Yann Quelenn, market analyst: Swiss watch exports continue to decline: “Swiss watch exports continue to head south as today’s report indicated a significant decline of 14.2% y/y in July, according to the Federation of the Swiss Watch Industry. The biggest drop was in Hong Kong, down 32.7% y/y, representing the 18th consecutive month of downturn. In Europe, sales have also largely declined - in France for example by 27.8%, certainly due to growing fear following the recent atrocities. The Asian market however, is the one that is most at stake and took an especially big hit with the announcement that Chinese authorities are regulating gift giving. In terms of volumes, all price ranges have been affected by the decline, in particular below 200 francs and above 3000 francs.
The reason why demand is being pushed lower is largely due to an overvalued franc, which is unfortunate for manufacturers as we will not see any pick-up in demand as long as the currency remains so strong. Downside pressure on the Euro is very likely, markets expect further stimulus from the ECB and the Chinese economic slowdown may be deeper than expected.
However, there is one silver lining and that is that the Swiss trade balance still remains largely positive, even though it declined to CHF 2.93 billion from CHF 3.55 billion. In other words. the situation is still manageable and importing inflation may be one solution for Switzerland, even though it would mean sacrificing the exports’ economy. With mounting evidence that the strong CHF is damaging Switzerland’s domestic economic, there will be increased calls for the SNB to defend the CHF. However, the SNB is running out of options, having already exhausted many policy tools.” —
Today traders will be watching consumer confidence from Denmark; manufacturing, service and composite PMI from France, Germany and the euro zone; an interest rate decision from Turkey (market is expecting a 25bps rate cut of the lending rate to 8.50%); manufacturing PMI, Richmond manuf. index and new home sales from the US.