EUR/CHF is heading higher but not for long
The Helvetic currency is suffering against the euro and the pair is back below 1.15. We nonetheless do not believe that the two will continue to head towards 1.20, and the ongoing move may not be sustainable in the medium-term.
The fundamentals behind the recent surge of the euro against the franc appears unclear. The economic and political situation have not changed during the summer. Yet we consider that this is only a catch-up as the euro strengthened against major G10 currencies on growing expectations of the Eurozone recovery. Markets now expect the ECB to narrow the monetary policy divergence with the Fed.
European geopolitical tensions have also been very calm during this summer. It is also important to remember that the massive Greek debt issue is far from been solved and this will likely weigh again on the European Union unity.
Those basic reasons are our rationale on why downside pressures on the EUR/CHF pair are set to appear again. Markets definitely overestimate the Eurozone recovery.
Minutes to highlight divergence among Fed members
The solid print in retail sales and the Empire State Manufacturing Index yesterday helped the greenback catch his breath. Retail sales advanced strongly in July, climbing 0.6% m/m versus a forecast 0.3%, while the previous month’s reading was revised to +0.3% (from -0.2% initially estimated). The core measure that excludes auto dealers and gasoline stations picked up 0.5% m/m following an upwardly revised figure of 0.3% in June. After a series of disappointing reports, it seems US consumers are finally ready to open their pockets. This acceleration of consumption is definitely a good omen for GDP growth as household consumption accounts for roughly 70% of the US economy and contributes to inflation. However, for the ladder, it will take a longer for this to translate into firmer inflation reading.
The July FOMC minutes will be published later today and will likely show divergence, as usual, among Fed members. Last week, Bullard and Kashkari were quite dovish as they highlighted the persistent weak inflation pressure, while earlier this week Dudley appeared confident about the inflation outlook. Divergence, we told you. All in all, we believe that the minutes won’t be a game changer; the Fed will keep the surprise until September in order to have more flexibility.
The greenback extended gains this morning, rising the most against the Swiss franc, the Japanese yen and the euro. However, commodity currencies and the pound sterling were edging higher, mostly due to positive local developments (strong wage growth in Australia, a pick-up in commodity prices and positive development in the EU-UK relationship outlook).