CHF tightropeBy Peter Rosenstreich
The Swiss franc and the Swiss National Bank continue to walk a knife-edge. On one side, Switzerland’s consumer price inflation rose higher than forecasted: this could trigger a quicker normalization of extreme policy. On the other side is the SNB’s dangerous game of extreme policy: negative interest rates. Unwinding these comes with significant uncertainties. This could catalyse reloading CHF long by investors who have abandoned the currency due to high carry costs.
Swiss May CPI came in at 0.4% monthly vs. 0.3% expected, while core CPI climbed 0.1% monthly and 0.4% yearly. The trend was spread broadly, but it will not reach the SNB target until late 2019, so the central bank is unlikely to panic yet. Calls to accelerate tightening are likely to fall on deaf ears. With political risk rising in Europe boosting the CHF, the SNB will stay defensive. Its 21 June rate decision will focus on weakening the ‘overvalued’ CHF, rather than acknowledging inflation. EUR/CHF was higher on the news, as trades remain focused on the short term positive news out of Italy.
EUR better bidBy Arnaud Masset
EUR/USD finally broke 1.1745 resistance and EUR/CHF climbed towards 1.16. This might surprise, after the new Italian government won the Senate confidence vote, but Prime Minister Giuseppe Conti said he has no intent to leave the Eurozone. In his first speech to the Senate, he reiterated anti-austerity and a friendlier stance towards Russia.
Italian bond yields climbed further yesterday and continued on Wednesday with the 2-year and 10-year rates rising as much as 1.49% and 2.96%, respectively. Traders dumped Italian equities, downing the FTSE MIB by more than 1% during the European morning. Investors do not believe the Italian situation will negatively affect the entire EU, so they are fleeing Italian assets but not European ones, for now. This raises doubt of a return of EUR/CHF to 1.20 in the short-term. On the other hand, there is room for further appreciation in EUR/USD as the trade war between the USA and its allies weighs on the greenback.
Ram-euphoria easesBy Vincent-Frédéric Mivelaz
South African President Cyril Ramaphosa’s challenge is lively. Since taking office on 15 February, he has faced a strong downturn, with Q1 economic output at a 9-year low (-2.20%; prior: 3.10%), strongly impaired by industries including agriculture, forestry, fishing (-24.20%), mining & quarrying (-9.90%) and manufacturing (-6.40%) compared to Q4 2017. Recent developments in GDP will deteriorate business and consumer confidence, putting into question Ramaphosa’s capability to reform the country. South African economic growth remains fragile and the situation exceeds the capabilities of its leaders.
The rand weakened further, decreasing 2.01% against the greenback, valued at 12.8575 and trading at its mid-December 2017 range. The pair is expected to strengthen, approaching 12.90 in the mid-term.