Upside surprise in Swiss data

The publication of the latest batch of economic data from Switzerland went largely unnoticed as investors await impatiently the results of the UK general election and Mario Draghi’s press conference later this afternoon. The EUR/CHF was treading water above the 1.0850 threshold, while USD/CHF stabilised at around 0.9650.

The unemployment rate eased to 3.2% (seasonally adjusted) in May, beating median forecast of 3.3%, while the previous month’s figure was downwardly revised to 3.2%. Investors also got a positive surprise on the inflation front as the headline measure printed at 0.5% y/y, well above estimates of 0.3%.

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However, the HICP measure, which allows to compare inflation pressure with that of its European neighbours, shrunk 0.2% m/m in the previous month. On a year-over-year basis, the indicator eased to 0.4%, down from 0.7% in April. There is no reason to worry as core inflation continued to accelerate in May, highlighting the negative effect of the most volatile components, especially petroleum products.

We expect the economic conditions in Switzerland to continue to improve along with the European economy. However, upside pressures on the Swiss franc will take time to dissipate as investors are looking for sustained improvement in the EU before turning their back on the Swiss currency.

ECB meeting: markets expect hints of normalization of the monetary policy

The euro is trading mixed ahead of the ECB meeting today. The European Central Bank is expected to cut its inflation forecast for 2019. Indeed the CPI should, according to an official European report, fall to 1.5% within the next three years while growth should remain below 2%.

In addition, markets are now waiting for hints about the future of the monetary policy. The massive easing did not yet have the expected results. Concerns are also from German Chancellor Angela Merkel and also from Dutch officials. Recently at the end of a meeting with the Dutch parliament, Draghi was offered a plastic tulip to remind of bubble concern.

Today, the rates are not likely to be changed. The press conference will be widely followed. It should have a positive impact on the single currency as we believe that we are approaching towards an inflexion point regarding monetary policy.

Trade the risk recovery on strong China data

The headline events have drowned out most everything else. Even before the prime time events of today, the former FBI Director James Comey’s pre-prepared statement, despite providing no new revelations, stole the news cycle from more investment critical news.

In the background Chinese exports and imports both increased more than anticipated. China’s May trade balance printed 281.6bn CNY against 324.1bn CNY expected. Exports increased 8.7% y/y vs. 7.2% expected while imports rose 14.8% y/y vs. 8.3% expected.

Interestingly import growth was driven by “other imports” not commodities which suggest a correction next month. That said the solid read offsets some dire predictions of a sharp economic slowdown and due to mixed recent data is less probable.

The read should also provide a temporary backstop for risk sentiment. We agree the recent surge in volatility has provided a bit of a white knuckle ride yet we remain confident that as the news cycle shifts the good fundamental environment will drive EM prices higher. We sell JPY against EM on the back of Japan’s weak -0.3% 1Q GDP release.

BoJ Kuroda has been increasingly pressured by hawkish politicians to acknowledge the strong economic data and outline an exit strategy. However, today’s disappointing read provides the BoJ some cushion to delay any shift in policy. USDJPY rebound will be challenged at 110.40 resistance.


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