Swiss franc to climb short term
By Yann Quelenn
Latest data from the Swiss National Bank shows that bank deposits have declined slightly. This takes pressure off the franc, and boosts the euro against it. Now with a euro costing just below 1.17 francs, the road is opening to a 1.20 value in the medium term. In the longer term, this might be unsustainable, because European economic uncertainties will weigh on the euro.
Still, there are fears of deflation. We suspect inflation is coming back: it is a matter of time before imports create inflation. Tomorrow will give a hint, with the release of consumer prices for November.
Dollar rally on tax-reform advance
By Arnaud Masset
After the US Senate approved President Trump’s proposed tax reform, the USD dollar has boomed this morning, extending gains against all its G10 peers. The biggest increases are versus the Japanese yen and the Swiss franc (+0.65% both), the New Zealand dollar (+0.45%) and the Swedish krona (+0.38).
This long-awaited development comes a little late, as investors have shifted attention to the European Central Bank’s money tightening and the economic acceleration in the euro zone. We expect the euro to keep appreciating against the greenback. On the other hand, high quality commodity currencies, such as the Aussie and the Kiwi, should suffer from narrowing interest-rate differentials against the US. EUR/USD is currently trading at around 1.1850, slightly below the 1.1961 resistance (high from 27 November). On the downside, a support lies at 1.1809 (low from 30 November).
Tax reform is popular with US businesses. The proposed law could reduce corporate tax rates to 20% (compared to 35% currently) and cut individual taxes too.
Aussie flat, loonie might tighten
By Peter Rosenstreich
In Australia, the central bank is expected to hold its policy rate at 1.5%. The bank is worried about weak housing, retail sales and wage growth. Markets are pricing in a rate hike not until 2019, so the bank’s dovish tone will have a limited effect on AUD.
The Bank of Canada might surprise with a hike. Heading into December there was only 10% probably of a hike, yet stronger economic data has pushed pricing to 20%. The BoC might do so to combat high valuations and household overleveraging. We suspect the market is under-pricing the risk of an unexpected rate hike.