News and Events:
Swiss people to draw their economic future
Next Sunday, the Swiss will vote on a key matter that could redefine Switzerland’s economic landscape. Back in September 2016, the Socialist Party, the Swiss Trade Union Federation and the Green Party successfully collected the 50,000 signatures required to put this game changing corporate tax reform to a nationwide vote. The voting results will be published on Sunday February 12th throughout the afternoon.
In a nutshell, the Corporate Tax Reform Act III (RIE III in French) is aimed at normalising the Swiss corporate tax system that is currently offering important benefits to foreign companies. Indeed, the current system allows holding companies and companies that make most of their revenue abroad to pay little or no income tax at both the canton and municipal levels. This system has been creating strong incentives for foreign companies to relocate their head office to Switzerland but at the same it has led to a growing number of discontent countries, mostly from the European Union, which accuse the country of depriving them of up to CHF 36.5bn in tax revenue each year. Over the last few years, Brussels has placed increasing pressure on the Swiss government to abolish these special tax regimes, threatening to re-establish trade-tariff and put the country on the tax haven blacklist.
Sunday’s vote is extremely polarised as the referendum committee – mostly left-wing parties – argue that the adoption of the new system would drive down tax revenue by CHF 2.7bn each year, which would pass on the tax burden to citizens. On the other hand, central and right wing parties believe that this is the only solution to save the 150,000 jobs directly related to those companies which benefit from these preferential tax rates. There has been harsh confrontation between the two camps and the results of the voting will likely be a coin toss. The stakes are high for the 8.5mio inhabitants as a substantial part of Switzerland’s success is due to these special tax regimes.
Looking at the persistent strength of the Swiss franc over the last few weeks, it seems that the market is widely underestimating the negative effects of a “no” vote to this Corporate Tax Reform Act. EUR/CHF is once again challenging the 1.06 support area this morning, keeping the SNB on its toes.
French elections becomes a referendum on EU membership
The French presidential election narrative has quickly shifted from a debate over domestic policy to a clear referendum on EU membership. By re-defining the vote as a question of EU participation, Marine Le Pen has deftly tilted the advantage in her favor. Le Pen has forced the French population to look away from some of her more controversial ideology to weigh only the headline agenda. One that has had growing popularity and the ability to skillfully address many of the core issues French civilians are concerned with (such as security and national identity). While the left struggles to find a scandal-free candidate (Macron forced to deny an extramarital affair and Fillion faces abuse of public funds charges), the National Front will focus on hammering home the benefits of a “return to monetary sovereignty.” The evolution of a French EU referendum has significantly increased the political risk and will weigh on the euro. We remain constructive on EURUSD but see upside contained by the French election outlook and possible “Frexit.”
Japan: Best current account surplus in nine years
The Japanese current account surplus released this morning for December marks the biggest surplus since 2007. Today’s data is also the 30th positive surplus in a row. The data shows an increase of 20.65 trillion yen (around $183 billion). Last year, lower energy prices as well as a stronger yen drove down import prices. Looking deeper into the 2016 account surplus, the lion’s share seems to stem from direct investment account.
On the political front, Donald Trump has made his position very clear and will fight against such massive trade surpluses from Japan and China. Foreign exchange rates will be a key topic when Trump meets his Japanese counterpart Shinzo Abe, in a few days time. In our view, Trump’s decision to weaken the greenback was a tactical shot at Japan as it continues to battle with its constantly appreciating currency.
The currency war is only gearing up. The BoJ has decided to defend the flat rate on 10-year JGBs despite rising US rates. We reaffirm our bearish position on USDJPY.
Today’s Key Issues (time in GMT):
- Dec Household Consumption (MoM), last 0,30%, rev 0,50% SEK / 08:30
- Dec Household Consumption (YoY), last 3,30% SEK / 08:30
- Feb 8 RBI Repurchase Rate, exp 6,00%, last 6,25% INR / 09:00
- Feb 8 RBI Reverse Repo Rate, exp 5,50%, last 5,75% INR / 09:00
- Feb 8 RBI Cash Reserve Ratio, exp 4,00%, last 4,00% INR / 09:00
- Jan Light Vehicle Car Sales YoY, exp 0%, last -1% RUB / 09:23
- Feb 7 FGV CPI IPC-S, exp 0,65%, last 0,69% BRL / 10:00
- Jan IBGE Inflation IPCA MoM, exp 0,42%, last 0,30% BRL / 11:00
- Jan IBGE Inflation IPCA YoY, exp 5,40%, last 6,29% BRL / 11:00
- Feb 3 MBA Mortgage Applications, last -3,20% USD / 12:00
- Feb 6 CPI WoW, last 0,10% RUB / 13:00
- Feb 6 CPI Weekly YTD, last 0,60% RUB / 13:00
- BOE Deputy Governor Jon Cunliffe speaks in Birmingham GBP / 13:00
- Jan Housing Starts, exp 197.3k, last 207.0k CAD / 13:15
- Currency Flows Weekly BRL / 14:30
- Feb 3 DOE U.S. Crude Oil Inventories, exp 2500k, last 6466k USD / 15:30
- Feb 3 DOE Cushing OK Crude Inventory, exp -500k, last -1245k USD / 15:30
- Feb 9 RBNZ Official Cash Rate, exp 1,75%, last 1,75% NZD / 20:00
- RBNZ’s Wheeler news conference on policy statement NZD / 21:00
- Dec Building Permits MoM, last -9,20% NZD / 21:45
- Jan Foreign Direct Investment YoY CNY, exp 1,40%, last 5,70% CNY / 23:00
The Risk Today:
EUR/USD’s selling pressures have increased. It seems that strong hourly resistance area is given around 1.0800. The road is wide-open towards hoourly support at 1.0581 (16/01/2016 low) and 1.0454 (11/01/2017 low). Expected to see continued consolidation. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.
GBP/USD is still trading below resistance given at 1.2771 (05/10/2016 high). The technical structure suggests that the pair should keep bouncing lower towards support given at 1.2254 (19/01/2016 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY is slowly pushing lower towards support at 111.36 (28/11/2016 low). Hourly resistance is given at 115.62 (19/01/2016 high). The break of hourly support given at 112.57 (17/01/2017 low) has confirmed bearish pressures. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF‘s momentum is still bearish despite ongoing increase. Key resistance is given at a distance at 1.0344 (15/12/2016 high). We believe that the road is clearly wide-open for further decline if the pair fails to break and to hold above parity. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.