- We do not see the Hong Kong Monetary Authority abandoning the peg any time soon
- We remain rather cautious on the Japanese yen as its current strength is more due to the investors’ appetite for safe haven assets rather than a market’s response based purely on fundamentals
- GBP will remain weak on economic outlook and Brexit risks
- With economic data weakening, the absence of domestic inflation pressures, an increased global risk and fear of Brexit, we do not see the BoE raising rates before 2017
- It also seems that we are not in a full risk-off environment as the continued weakening of the Helvetic currency against the single currency is also proving the market confidence in the European Central Bank’s policy despite Draghi announcements
- We think that the EURCHF may go up to 1.1200 but not above as downside pressures will then be too strong
The rally initiated on Friday proved to be short-lived as Asian equities joined the global rout on Tuesday as crude oil dip below $30 a barrel. Mainland Chinese stocks were leading the charge with the Shanghai and Shenzhen Composite down . In Japan, the Nikkei 225 fell 2.35% while the Topix index retreated 2.33%. In Hong Kong, the Hang Seng was down as rumour concerning the removal of the USD/HKD peg fade away. Indeed, the HKD peg has been extremely positive for Hong Kong’s prosperity by providing stability and allowing the nation to become a hub of international finance. HKD’s effective exchange rate and inflation differentials with the US does not warrant significantly higher USD/HKD. Hence, we do not see the Hong Kong Monetary Authority abandoning the peg any time soon.
Once again, the yen took advantage of the overwhelming risk-off sentiment by appreciating sharply against all the G10 currencies. The Japanese currency rose 0.65% against the Aussie, 0.60% versus the GBP, 0.52% versus the Kiwi and 0.50% against the loonie. However, we remain rather cautious on the Japanese yen as its current strength is more due to the investors’ appetite for safe haven assets rather than a market’s response based purely on fundamentals.
In Europe, after last week’s short recovery, the pound sterling is back in turmoil, down 0.27% against the US dollar as a result of a stronger demand for US treasuries - 2-year was down 3bps, 5-year is down 3.5bps while the 10-year fell 2.6bps. GBP will remain weak on economic outlook and Brexit risks – With economic data weakening, the absence of domestic inflation pressures, an increased global risk and fear of Brexit; we do not see the BoE raising rates before 2017. The UK referendum must take place before the end of 2017 and it is likely that PM Cameron will fast track the vote indicating a March announcement.
For the third time in less than 24 hours, EUR/CHF took off on the assault of 1.10 on a softer trade surplus with a reading of CHF 2.54bn.The market was a expecting a surplus of CHF 2.90bn in December. The demand for Swiss watch contracted 3.8% in December 2015 compared to a year ago with the biggest diminution from Hong Kong where exports collapsed by 21.1%y/y. The exports in the Jewellery sector (including watches) was the only one that was able to growth in 2015 against the backdrop of weak global demand, falling oil prices and strong Swiss franc.
Today traders will be watching PPI report from Sweden; current account balance and foreign direct investment from Brazil; FHFA house price, S&P/CaseShiller index, Markit services and composite PMIs from the US.
Yesterday, the Swiss Franc has weakened to 1.10 CHF for one euro for the first time since September last year. In a world where actual returns are very difficult to grasp, the Swiss currency is more and more used as a funding currency. This is of course providing some relief to the Swiss National Bank which is still concerned about the overvaluation of the currency. The continued weakening of the Helvetic currency against the single currency is also proving the market confidence in the European Central Bank’s policy despite Draghi announced at last week’s meeting that the current European monetary policy will be reviewed at next March’s meeting and that more stimulus may be added.
Yann Quelenn – Market Analyst “It also seems that we are not in a full risk-off environment. The Global turmoil, the Chinese slowdown and current equities losses are not yet sufficient to give back the safe haven status to Switzerland. For the time being, the yen looks much more attractive due to the fact that the overnight rate, even though very low, is positive. A long position in the Japanese currency provides interests. Last but not least, the Switzerland economy is at stake, for example December Trade Balance has been released this morning well below expectations are CHF 2.54 billion vs CHF 3.14b and the exports are also suffering with a continued declined to -1.4% m/m vs a prior revised data of -3.3% m/m for November. Anyway, we believe that there is a threshold for which a too strong risk-off environment will drives inflows of capital toward Switzerland. For the time being, confidence is still there, monetary policies around the globe are still believed to be efficient to help countries to recover from current economic slowdown. As a result, we think that the EURCHF may go up to 1.1200 but not above. Downside pressures will then be too strong.”