News and Events:
ECB to stay quietly on the sidelines
The next week will be very busy in terms of monetary policy with two of the most important central banks holding key meetings. In the US, the Federal Reserve is widely expected to rise its benchmark interest rate next week amid a continuous increase in consumer prices and rising inflation expectations. Across the Atlantic, the ECB has finally glimpsed the results it was hoping for. Indeed, inflation has returned in the Eurozone as the headline measure jumped to 2%y/y in February. As a result, Mario Draghi is already feel the heat from ECB hawks as they push to normalise the central bank’s monetary policy. However, Draghi will most likely stand his ground as switching from dovish to hawkish would be more than counterproductive as it would give a boost to the single currency, which would eventually weigh on price pressure. In addition, the core measure, which excludes the most volatile components such as food and energy, is still stuck below the 1% mark (0.9%y/y in February). Mario Draghi will not hesitate to heavily emphasise that underlying price pressure remains weak.
All in all, Mario Draghi is not yet ready to radically change his tone, preferring instead to wait for further improvement in the Eurozone economy before starting to taper. Moreover, the ECB’s bond purchasing program is slowly reaching its limits as the lack of bonds constitutes a major issue.
Therefore, we do not believe that today’s meeting will trigger any trends in EUR crosses. Save your ammo for next week’s FOMC meeting as investors scrutinise the Fed’s forecast.
SNB in a Corner
As everyone knows, the SNB has been intervening to protect the CHF from further “overvaluation". Today, the SNB released data indicating foreign exchange reserves surged 3.8% to 668.2bn CHF (Total balance sheet is over 115% of GDP). While the SNB does not generally comment on intervention, the size of the balance sheet expansion indicates that the SNB has been very active in FX markets (protecting 1.06 soft floor).
The problem is that the pace of purchases is unsustainable (printing unlimited CHF could lead to hyperinflation and credibility issues), yet demand for CHF is likely to increase (1. Rising political risk in Europe 2. EU-CH yield spread stable/narrowing 3. Swiss economic conditions are improving). The language of SNB around FX policy has softened (supported by a positive inflation outlook) adding to speculation of greater flexibility yet clearly demand for CHF has outstripped the SNB’s view of smoothing.
EURCHF has become the “go to” trade to hedge European political risk, so selling pressure should increase as we head into the Dutch and French elections. Now I’m sure I don’t have to remind anyone that arguably the two biggest FX moves in the last few years have been created by the SNB (hence the concern), and their proactively addressing events/situation in Europe.
The problem is that, once again, the SNB is now “trapped” by their own policy. My concern is that the SNB’s “soft” FX policy has become “hard” in the market’s mind. When the SNB is forced to remove the verbiage/physical intervention (not sure which comes first), we should see EURCHF move sharply lower. The longer the situation remains, the greater likelihood of an extreme event.
Today’s Key Issues (time in GMT):
- Feb Bank of France Bus. Sentiment, exp 102, last 101, rev 102 EUR / 07:30
- Jan House transactions YoY, last 6,80% EUR / 08:00
- Feb Average House Prices, last 2.916m, rev 2.994m SEK / 08:30
- Schaeuble, Dombret Speak on Challenges for G-20 States, Berlin EUR / 08:30
- Feb Money Supply M2 YoY, exp 11,40%, last 11,30% CNY / 09:00
- Feb Money Supply M1 YoY, exp 16,60%, last 14,50% CNY / 09:00
- Feb Money Supply M0 YoY, exp 15,00%, last 19,40% CNY / 09:00
- Feb New Yuan Loans CNY, exp 950.0b, last 2030.0b CNY / 09:00
- Feb Aggregate Financing CNY, exp 1450.0b, last 3740.0b, rev 3737.7b CNY / 09:00
- Bank of Italy Publishes Monthly Report `Money and Banks’ EUR / 10:00
- Mar IGP-M Inflation 1st Preview, exp 0,05%, last 0,10% BRL / 11:00
- mars.03 Foreigners Net Bond Invest, last $258m TRY / 11:30
- mars.03 Foreigners Net Stock Invest, last $51m TRY / 11:30
- Feb Challenger Job Cuts YoY, last -38,80% USD / 12:30
- mars.09 ECB Main Refinancing Rate, exp 0,00%, last 0,00% EUR / 12:45
- mars.09 ECB Marginal Lending Facility, exp 0,25%, last 0,25% EUR / 12:45
- mars.09 ECB Deposit Facility Rate, exp -0,40%, last -0,40% EUR / 12:45
- Mar ECB Asset Purchase Target, exp EU80b, last EU80b EUR / 12:45
- mars.03 Gold and Forex Reserve, last 393.0b RUB / 13:00
- mars.06 CPI WoW, last 0,00% RUB / 13:00
- mars.06 CPI Weekly YTD, last 0,80% RUB / 13:00
- ECB President Draghi Holds Press Conference in Frankfurt EUR / 13:30
- 4Q Capacity Utilization Rate, exp 82,50%, last 81,90% CAD / 13:30
- Jan New Housing Price Index MoM, exp 0,10%, last 0,10% CAD / 13:30
- Feb Import Price Index MoM, exp 0,10%, last 0,40% USD / 13:30
- Jan New Housing Price Index YoY, last 3,00% CAD / 13:30
- Feb Import Price Index ex Petroleum MoM, exp 0,10%, last 0,00% USD / 13:30
- Feb Import Price Index YoY, exp 4,40%, last 3,70% USD / 13:30
- mars.04 Initial Jobless Claims, exp 238k, last 223k USD / 13:30
- Feb 25 Continuing Claims, exp 2062k, last 2066k USD / 13:30
- mars.05 Bloomberg Consumer Comfort, last 49,8 USD / 14:45
- 4Q Household Change in Net Worth, last $1593b USD / 17:00
- Feb Card Spending Retail MoM, exp -0,40%, last 2,70% NZD / 21:45
- Feb Card Spending Total MoM, last 2,50% NZD / 21:45
- Feb Foreign Direct Investment YoY CNY, exp -4,20%, last -9,20% CNY / 23:00
The Risk Today:
EUR/USD is moving lower. Hourly resistance is given at 1.0679 (16/02/2017 high) while hourly support at 1.0521 (15/02/2017 low) has been broken. The technical structure suggests deeper consolidation towards 1.0500. 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 has broken support given at 1.2254 (19/01/2017 low). The road is wide-open for further decline. Hourly resistance is given at 1.2214 (intraday high). 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 showing limited short-terms buying interest after reversing off base lows. Key resistance is given at 115.62 (19/01/2016 high). The technical structure suggests further renewed bearish pressures towards 112.00. 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 continues to improves after testing 1.0021 support. Hourly resistance is implied by upper bound of the uptrend channel. Key resistance is given at a distance at 1.0344 (15/12/2016 high). Expected to see further strengthening. 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.