Surge in Swiss KoF
(Peter Rosenstreich, head of market strategy)
The economic barometer will further enforce CHF strengthening, while making the SNB’s job considerably more difficult. In February, the leading indicators increased by 5.2 points to 107.2, indicating that the Swiss economy will grow at a quicker than normal pace. Despite the dire warning of the sharp CHF appreciation in early 2015, the Swiss economic backdrop seems to have weathered the lack of currency competitiveness well. Case in point, the highest contribution came from the manufacturing industry, which relies significantly on exports and therefore currency pricing should be critical to improvement. Data indicates a weakening sensitivity to FX valuations. Moving forwards, the economic improvement in both growth and inflation outlook will enable the SNB to allow greater flexibility in EURCHF pricing. The central bank will continue to move but action will be limited to smoothening rather than reversing the trend. We continue to view short EURCHF as the primary trade for navigating the impending European political uncertainty. EURCHF 1.0632 base support will provide the key test for traders and SNB (providing insight on how much CHF “overvaluation” they are willing handle).
Japanese retail sales positive in no wage growth environment
(Yann Quelenn, market analyst)
Since reaching its lowest level in a year against the dollar in December, the yen continues to strengthen. However, the BoJ has been unable to stimulate the economy over the past decade and fundamental data continues to concern. Industrial production came in last night at -0.8% m/m for January after financial markets were expecting a positive read. The yen is strengthening despite its economy being ironically out of control. Japan’s economy is clearly a market risk indicator.
Japanese policymakers are still expecting the Fed to raise rates in order to hold off some pressures from the economy. However, as we believe that the Fed is not going to raise rates we remain cautious as there will clearly be further room for disappointment. Uncertainties over Trump’s economic policies loom large.
It is also worth noting that retail sales have increased for the third consecutive month with a 0.5% m/m for January (1% increase annualized). Furthermore, wage growth slowed in December, which should reflect at some point in the retail sales. The truth is that wages are not at a sufficient level to support the economic recovery especially knowing that, once inflation is stripped away, wage growth for 2016 will in fact be negative.