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Risk still off but panic feeling lowered, Swiss retail sales disappoint

Swissquote Bank

- We view the current volatility in equity markets as merely a healthy correction rather than a full blown crisis

- For this week risk aversion trading will dominate with commodities, commodity-linked currencies (specifically NOK and CAD on soft oil demand and heavy supply) and EM currencies feeling little investors demand

- As labour market conditions are improving, we believe that Fed rate hikes expectations for March 2016 should have increased, although market participants are very concerned about the global uncertainties and in particular by China’s turmoil

- We remain bearish on the EURUSD

- USDJPY remains under selling pressure with expectations to extend bearish momentum to 116.15

Saved by the closing bell. Just when the crash hype was hitting a crescendo and media pundits pulled out Mr. Doom and Gloom himself (Marc Gaber) to support theories of a financial crisis worse than 2008, markets closed for the weekend. While Asian equites extend loses on China concerns there is not that same sense of panic. Risky assets were able to recovery slightly after the lower USDCNY fix but failed to hold gains. European stock futures are pointing to a marginally lower open. The Shanghai composite index is lower by -4.76%, Hang Seng -2.32%, while Japan’s equity market is closed for holiday. Friday's solid December payroll reports indicate (payroll growth of 292k) that US labor market conditions continued to progress. We view the current volatility in equity markets as merely a healthy correction rather than a full blown crisis. China’s policy markets disorganized and ill-advised actions will subject China to further downside risk yet confidence in the US recovery (Q4 weak data should be seen as soft patch rather than a downturn) should limit contagion. With a quiet economic calendar this week China and geopolitical events in the middle-east will continue to dominate headlines and drive asset prices. Weka commodity prices and spillover into global demand will have a profound effect on emerging markets this year. This week risk aversion trading will dominate with commodities, commodity-linked currencies (specifically NOK and CAD on soft oil demand and heavy supply) and EM currencies will feel little investor demand. ZAR came under heavy selling pressure as concerns over china and commodity prices plus local political instability and weak economic growth triggered technical selling by Japanese investors (reported by Bloomberg).

While evidence of a stronger labor market indicates a strengthening of the US economy the ability to manage higher interest rates should give the USD the advantage. Interestingly, since Friday despite the strong payrolls, expectations for a fed rate hike in March have decreased 3.0% on China and strong USD fears (rationale for a lack of USD demand after the data).

***Yann Quelenn, market analyst: “December Nonfarm payroll increased substantially to 292k, well above the market consensus which was betting on 200k. Coupled with this information, the unemployment rate printed at 5%. The data suggest that labour market conditions are improving. In addition the November NFP has been revised up to 252k from 211k. The service sectors are driving up the labour market as the sector added 230k to payrolls. Yet, the manufacturing payrolls only added 8k in December and it should not improve sharply this year as the current strong dollar and lingering low commodities prices will continue to weigh on the sector.

As a result, we believe that Fed rate hikes expectations for March 2016 have increased. However, market participants are very concerned about the global uncertainties and in particular by China’s turmoil. The Shanghai composite has lost more than 10% on the last three sessions. The probability of a Fed rate hike in March has now declined. In other words, markets need more insurance that the overall U.S. economy is recovering and won’t be “much” impacted by the global situation. The demand for dollars has remained stable and the S&P 500 lost 1.08% last Friday. Next data, as retail sales will confirm the sustainability of the ongoing momentum. We remain bearish on the EURUSD.”***

Outside of China’s asset issues, official data released shows that consumer inflation has shifted slightly higher on rising food costs. China CPI yoy rose to 1.6 from 1.5% in November, PPI held at -5.9%. The slight uptick is a glimmer that perhaps consumer demand is stabilizing. The PBOC sets CNY mid-point at 6.5626 against last close 6.5938.

In Australia, job advertisements fell -0.1% from 1.3%. In New Zealand building permits rose 1.8% against a revised higher 5.4%. Both reads will not help the AUD and NZD regain significantly lost ground against the USD. AUDUSD remains in a bearish formation with risk of further downside to test 06905 September low. With risk aversion high funding currency will remains in steady demand. USDJPY remains under selling pressure with expectations to extend bearish momentum to 116.15 August low (clearing minor support at 116.50).

Swiss retail trade sales fell -2.1 from -0.8% in November. The decline was broad-based, with negative contributions across the board and reinforced an alarming negative trend in consumer behavior. Although the number is significantly backwards-looking it does illustrate the challenge facing the Swiss economy. The strong CHF had changed consumer behavior to trade outside of Switzerland. We note that this period encapsulates the terror alert which paralyzed potions of the country, limiting activity. Recent data indicate that a deflation is entrenching and labor market softening. Switzerland continues to suffer with the strong CHF, as safe-haven trades are offsetting efforts by the SNB to deprecate the franc. We continue to see the domestic economy struggle with unseasonal warm El Nino weather keeping ski season tourism at home. With Switzerland still solid current account surplus, gold deposits and stable political environment investor will further rotate into CHF as China and global demand persist. This trend will intensify as Europe’s inflation prospects dim and the ECB shifts towards additional easing. Once again the SNB will need to stand ready to defend the CHF from unwanted appreciation.

Today investors will be watching will be Norway inflation data, Swiss retail sales and Canadian housing starts. Norway headline CPI should fall to 2.6% from 2.8 and core decelerate to 0.0% from 0.2%. With oil prices continuing to soften it’s likely that Norges bank will cut rates further at their March meeting regardless of elevated inflationary prints. We remain significantly bearish on the NOK given global demand and commodity price dynamics.

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