Swiss CPI surprises to the upside
Switzerland’s consumer price index rose more than expected during the month of September as it increases 0.7% year-over-year as it reached 100.9 points, beating slightly median expectations of a 0.6% increase. On a month-over-month basis, the headline gauge rose 0.2%, matching expectation. The price increase was mostly driven by a price rise for clothing and footwear (+7.4%y/y).
The Swiss franc held steady following the release of the data. EUR/CHF rose a few pips to 1.1483 before reversing gains. USD/CHF did not react at all as the pair is mostly driven by development in the US, with ongoing speculation regarding Yellen’s potential replacement and Nonfarm payroll figures due for release tomorrow.
From our standpoint, the fact that the euro was able to hold recent gains against the Swiss franc suggests that investors are definitely not worried with the Catalan situation. Regarding the upside surprise in inflation reading, it could be tempting to conclude that the SNB will have to adjust its monetary policy as inflation pressures finally pick-up. In addition, we are still far from the SNB’s 2% inflation target, there is therefore plenty of room before calling for a tighter monetary policy.
Long USDJPY
Sentiment around the USDJPY remains negative causing the par drift down to 112.35 yesterday. Yet, outlook supports a higher USDJPY. Recent election news has been causing JPY volatility. News that the popular Tokyo governor Koike would not stand as a candidate for PM should have weaken JPY but has a muted effect. There has been a general rise in support for Abe and his LDP party according to polls, shifting away from upstarts and historical opponents. Moving forward we expect the LDP will further strength control of the 465 seat parliament.
The increase probably of Abe remaining to drive Japanese policy suggest that “Abenomics” and the systematic debasing of the JPY will continue. However, given the exhausted tools accessible the BoJ external factors are more likely to drive JPY pricing. In this regard, our base scenario is a USD rally in the short-term. Our thinking based on growing risk in Catalonia Spain and underpricing of Fed policy path (65% probably for a 25bp rate hike in Dec). We remain constructive on USDJPY with expectations for extension of bullish rally to 114.35.
Catalan political crisis weighs on euro bulls
Benoit Coeuré, a ECB member, will speak on Thursday in a panel in Frankfurt and the accounts of the September ECB meeting will be published today. We believe that the panel’s discussion will be mostly on the size of the potential reduction of the ECB balance sheet starting in January. We continue to consider that markets are way too optimistic regarding this asset purchase reduction. Markets have sent the euro too high at the moment. Yet, the momentum, which is pausing at the moment, will likely be back on ECB meeting expectations as soon as we get closer to the meeting date which will be held the 26th of October.
The Eurodollar is pausing at the moment below 1.18. Catalonian uncertainties have not clearly weighed on the pair price. We nonetheless believe that bulls have been reduced. Catalonia will declare its independence in a matter of days have declared a Catalan leader. Tensions are then likely to increase and political risks will definitely add downside pressures on the single currency. Markets have not priced in yet any deep consequences of this independence.
Volatility is set to increase, a euro sell-off may be triggered by the Catalonian crisis. Yet, one should not forget the high expectations from the ECB.
