Swiss trade balance widens, but CHF still weakens against EUR
By Yann Quelenn
Upside pressures on the EUR/CHF should continue to happen before the European Central Bank’s Monetary Council meets on 7 September. One week later the Swiss National Bank will issue its latest views on monetary policy: we expect no change in its interest rates. The CHF was down this morning against the single currency and is back towards 1.14 CHF for one euro.
Meanwhile, Switzerland’s trade balance increased in July to CHF 3.51 billion from CHF 2.81 billion in June, mostly due to a slowdown in growth of imports. The franc’s overvaluation is pushing down the exports, but the surplus persists. Watches and watch components are a major export driver, reporting July growth of 3.6% year on year.
Stay long on risk
By Peter Rosenstreich
Investors’ current flight to safer havens is, in our view, unjustified. We opt to go long risk. Federal Reserve Chair Janet Yellen’s remarks this Thursday-Friday at Jackson Hole, Wyoming, will be the next significant, scheduled event to move markets. We believe she will say that markets are mispricing Fed-tightening risk.
The current round of risky-asset weakness and rising volatility has been blamed at least in part on US President Trump’s deployment of additional troops to Afghanistan. In reaction, the VIX volatility index spiked to a high of 16, US equities fought to sustain gains and the USD slid to 108.60 Japanese yen.
True, Trump’s move goes against his campaign promises, but the deployment’s lack of detail suggests we should not assume long-term structural consequences. Some pundits say this is Trump’s attempt to stabilize a turbulent administration. By contrast, we suspect it is simply that Trump lacks foreign policy experience and a broad agenda.
Are EU and US government yields ready to rally?
By Arnaud Masset
A recovery in treasury yields is coming, especially in the euro zone and the US. Given the fact that investors will most likely get rid of EU and US bonds at the same time, the effect on EUR/USD is hard to predict.
The declining rush for bonds was signalled by the recent risk-off failure to send yields lower. Demand for treasuries across the globe has been growing recently, as investors worry about monetary trends on both side of the Atlantic. US yields have moved in a downtrend since the start of summer. US 10-year rates slid as much as 20 basis point, from 2.395% down to 2.20% as investors discounted a hawkish Federal Reserve unwinding program. The 2-year rate fell 13 bps to 1.30%. Similarly, Germany’s benchmark 10-year government bond yield lost 22 bps to 0.40%, while the 2-year rate gave up 16 bps and returned to -0.71%.
The situation is quite different from that of commodity exporter countries such as Australia, New Zealand and Canada. Indeed, the spread has widened during the entire summer. A contraction of the interest rate differential would add incentive to sell those currencies as yield hungry investors reallocate their portfolios.