Evidence of FX intervention as SNB Reserves Surge
(Peter Rosenstreich, head of market strategy)
The Swiss National Bank's foreign exchange reserves surged 3.8% to 668.2bn CHF. While the SNB does not generally comment on intervention, the size of the balance sheet expansion indicates that the SNB has been very active in FX markets. This has been the fastest accumulation since December 2014 when the SNB was under siege to defend the 1.200 floor. Data published today suggests that the SNB greater exchange rate flexibility did not account for fear-driven flight of capital out of Europe. The strong demand for CHF indicates just how worried European investors are regarding political developments. Despite an improvement in inflation and the growth backdrop, SNB Jordan continues to define the CHF as “significantly overvalued.” Unfortunately for the SNB the short EURCHF trade remains the cleanest way to hedge mounting European political risk. We anticipate that despite SNB intervention the EURCHF will continue to grind lower. On a side note, judging from the SNB actions they are not concerned about US President Trump administration labeling Switzerland a “Currency Manipulator”.
Australia’s central bank holds rates, AUD surges
(Arnaud Masset, market analyst)
As broadly expected, the Reserve Bank of Australia kept its cash rate target unchanged at a record low of 1.5%. The RBA reiterated its well-known view that the Aussie is overvalued and stated that an appreciating exchange rate would complicate the economic transition that followed the mining investment boost. However, the institution acknowledged the positive development in commodity prices that provided “a significant boost to Australia’s national income”.
Despite the RBA’s positive assessment of the economy, Governor Lowe maintained a cautious stance about Australia’s outlook, recalling that the “medium-term risks to Chinese growth remains”. Indeed, China is Australia's biggest trade partner as it absorbs around 35% of Aussie total exports. From our standpoint, we suspect that the surge in commodity prices - more specifically iron ore prices - is coming to an end and that a reversal is looming as Chinese stockpiles went through roof while crude steel production remain subdued.
For all these reasons, we believe that the RBA is definitely not on its path to tighten its monetary policy as the inflation gauge is still well below the 2%-3% target band. The year-ended trimmed mean inflation reached 1.6% in December 2016, while the headline gauge hit 1.5%. There RBA is therefore in no hurry to tighten; however should commodity prices consolidate the recent gains, inflation will quickly start to pick-up. Looking at the AUD this morning, it seems that investors consider the latter scenario as highly probable as the Aussie rose 0.30% against the greenback and erased partially last week gains to return above the 0.76 threshold. On our side, we maintain our bearish view on AUD/USD with 0.75 as next target.
On the technical side, a first support lies at around 0.7530-40 (200dma and 50dma), then 0.7519 (Fibonacci 38.2% on December-February rally). Should AUD/USD break these levels, the road will be wide open towards 0.73-0.72.