Busy day for the greenback
After surging across the board yesterday, the US dollar partially reversed gains during the Asian session, with the dollar index returning towards 94 followinga positive surprise in the PPI Index. November’s headline producer prices gauge rose 3.1% year-over-year, beating median forecast of 2.9% and previous month reading of 2.8%. This is the largest increase since January 2012. Excluding the most volatile components, such as energy and food prices, the measure increased 2.4%y/y, matching market expectations. The surprise in the headline gauge is not exclusively due to the solid gains in crude oil prices throughout November but also due to the distortions created by the Hurricane season.
November’s consumer price index is due for release today. The headline gauge is expected to notch up to 2.2%y/y from 2% in October. The core measure should remain stable at 1.8%y/y. An upside surprise in the headline measure appears likely, especially against the backdrop of positive pressures from energy prices. However, the market remains cautious regarding the inflation outlook as the 1y breakeven inflation currently stands at around 1.43%y/y.
Finally, the December FOMC meeting will be the main event today. Fed members will provide their latest update on both the inflation and growth outlook. The main question today is not whether the Fed will raise borrowing costs today, as it already priced in at 100%, but rather how dovish/hawkish Janet Yellen will sound during the press conference. Any significant change in the dot-plot could affect significantly the USD outlook. So far, the market is expecting at least two rate hikes next year, if not three.
SNB Happy on the sidelines
The SNB is not moving, unwilling to disrupt the markets current narrative. From the SNB vantage point macro and domestic conditions are in a sweet spot for current policy. Inflation rates have improved but are nowhere near the SNB target rate while the short CHF is on most analyst top calls for 2018. All the while growth outlook has improved, led by export and manufacturing, supported by the weak CHF. The SNB will remain on the sideline, keeping rate unchanged and reiterating its pledge to intervene in the FX markets is needed.
SNB members will continue to sound cautions on exchange rate believe the CHF remain overvalued. Despite the improving backdrop its unlikely the SNB will get ahead of the ECB in tighten. This would put the first hike well into 2019 indicating that current pricing it too optimistic. We remain long on EURCHF.
