Did the SNB intervene in the FX market to prevent further CHF strength?
The Swiss franc started the year in the best possible way against the single currency, at least in the view of the Swiss National Bank, as EUR/CHF climbed to its highest level since January 2015 and hit 1.1832. Unfortunately, for Thomas Jordan his team, this period of respite was short-lived as the currency pair headed back down over the last week and fell as low as 1.1572 during the Asian opening.
The second half of 2017 were like holidays for the SNB, with EUR/CHF climbing as much as 10% to reach 1.1832 on January 15th, and allowed the monetary institution to reduce dramatically – if not completely phasing out – it FX intervention. Indeed, total sight deposits at the SNB stabilized at around CHF 575 billion, down from the record level of CHF 579.7 billion reached in August last year.
Last night, EUR/CHF’s price action was volatile before the currency pair starts to pick up towards 1.1630. There is rumours that the SNB has had to step to stop further CHF appreciation. As usual, it is hard to tell whether the rumours are true or not. However, given the sharp appreciation of the Swiss Franc of the past couple of weeks, there is little doubt the central bank won’t stand and watch the CHF going to the moon. Market participants will get more information next Monday when the SNB will release its weekly report. We believe the central bank won’t let the currency pair move below the 1.15 threshold.
Japan economy is in good shape
Japan presents modest to promising economic results since the beginning of the year. The BoJ remained optimistic as to reaching its “medium- to long-term inflation expectations”, thus approaching its CPI Y/Y 2% target according to its January quarterly outlook for economic activity and prices report (effective December 31st 2017 inflation rate at 1%). With positive output gap, Japan is showing signs of improvement in private consumption (view lifted for the first time in 7 months by the Japanese Cabinet Office), though still not strong enough according to officials. Tight market conditions also allowed Japanese government’s view to be revised upward, with a December unemployment rate expected to remain at 2.70%, a 24-year low (release on January 30th 2018).
Consumer spending slow increase (December Core CPI Y/Y at 0.90%) is attributed to low wage growth according to Shinzo Abe who declared on December 26th 2017 that companies have to raise wages by 3% or more, in order to broaden the benefits of his Abenomics stimulus. On the trade side, Japan presented robust December Exports Y/Y at 9.30% (slightly below consensus at 10.10%) and December Imports Y/Y at 14.90%, suggesting economic data that are in line with global economic growth. This week we will be looking at December Retail Sales and Household Spending on Tuesday and December Industrial Production on Wednesday and see if these indicators are supporting growth.
Recent published indicators suggest that Japan might be on the way to leaving its 2-decades long stagnation phase, though the BoJ has still a long way to go until reaching its 2% headline inflation rate target.
