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FX Week Ahead: Is The Swiss National Bank At It Again?

FX Week Ahead, by Shant Movsesian and Rajan Dhall MSTA of fxdaily.co.uk

Is the SNB at it again? EURO-phoria takes off as longer term investors get the nod.

Having focused on the USD in recent weeks, and how the market has rounded on the greenback 'en masse', we can finally look to some exchange rate moves outside of the major spot rates.  Sharp losses in the CHF have shown that the big money is taking note of the recovery in the Euro zone, and that investment prospects look good as the smaller member states are gaining traction alongside the power house that is Germany.  Last week, IFO economists said they saw little which could derail the domestic economy, including the strengthening EUR, which has traded to a little shy of 1.1800 in the past week, but more significantly, taking out the 1.1711/12 (long term range highs in the process.  This led to the 'follow through'  which saw EUR/CHF shooting up to levels close to 1.1400, having spent a year long slumber inside a 1.0600-1.1000 range. 

More data out next week is expected to confirm the above, headlined by EU wide Q2 GDP on the Tuesday, with updated manufacturing PMIs due out for all the leading states, as well as unemployment data.  Focus on Germany will be shared out a little to Spain and Italy, also seeing marked improvement in economic activity.  Spanish jobs have increased significantly, and in Italy, industrial orders have taken off, so no surprise for widespread calls for the ECB to rein in their APP, but once again, market forces are threatening to choke off some of this recovery.  As such, there is growing sentiment that once the ECB do signal policy change in Autumn, there will be a sense of disappointment - naturally linked to the rampant gains in the EUR seen already.  German 10yr hit levels shy of 0.65% a few weeks back, but the moderation of some 10bps or so looks to have been a short lived affair as Bunds took a sharp hit as the regional inflation data out of Germany saw healthy pick up.  On Monday we will see whether CPI is rising across the region as a whole, but consensus is looking for 1.3% in the headline, 1.1% in the core.

These levels remain a major concern for the ECB at the present time, but the market has been aggressively calling president Draghi's hand.  The Fed are similarly wary of tepid inflation rates - below 2.0% - but despite comparatively higher levels, the USD selling spree continues in certain quarters.  There are further signs that this is nearing a pause - or correction - for now, but we still see traders pouncing on any opportunity to offload, with Friday's mix of data case in point.  On Thursday, the large contribution from Boeing's large order books saw Jun durable goods rising 6.5% on the month, and this was backed up in the ex air and defence numbers, which although soft in Jun, were revised higher in May to offset this.  Cue the upwards revisions to Friday's Q2 GDP, but the 2.6% rise was pretty much on consensus.  Fingers were pointed at the soft advance PCE prices however, and along with a lower than expected employment cost index, it was business as usual with the USD index was hit back towards the weekly lows - though these held. 

EUR/USD as mentioned above could not get back into the upper 1.1700's again, but we saw USD/JPY pulled back into the mid 110.00's.  USD/CAD stole the show however, as the 0.6% GDP read for May blew the consensus 0.2% forecasts away, but I am still a little bemused as to why these weren't upgraded after some of the component readings for that month - notably wholesale sales at a much better than expected 0.9%.  Fresh from turning back off the low 1.2400's, the retracement into the mid-upper 1.2500's lasted less than 24 hours, and we were swiftly back near the lows again, but as above, excessive strength was curbed into the weekend. It is hard to argue that a 10% appreciation (1.3800 to 1.2400 give or take) in 10 weeks is not excessive.

Looking into next week, we have more on the US PCE as the Jun data is released on Tuesday.  Markets will have a chance to calm a little with Monday's schedule showing only pending home sales, but the following day we also have the ISM manufacturing PMIs for Jul, along with the personal income and spending stats which accompany one of the Fed's favoured metrics (core PCE).  The familiar main event at the start of the month is Friday's payrolls report, where once again the market is looking for average earnings to edge up to 0.3% from the flat-line 0.2% seen of late, while headline jobs growth is expected to come in around 175-180k vs 187k posted in Jun.  Again we expect some moderation in the USD ahead of this, but there is plenty before this, including ADPs, which will make it another bumpy ride, though any pullbacks vs JPY will be limited ahead of 112.00, and likely pre 1.1600 vs the EUR. 

The Canadian jobs report is also due at the end of the week, with little reason to believe the data will not signal continued improvement in the economy.  However, just as we are seeing in the EUR, the speed of the CAD recovery could be disruptive, and we have had some unsubstantiated reports that the government is a little concerned over the BoC's rate path trajectory.  The recent 25bp hike as it stands has come in the face of a housing market on the turn. Oil prices are also nearing some key levels, so there are mounting reasons for some consolidation here at the very least.  Notable levels seen just below here into the mid 1.2300's while a 1.2575 breach up top should signal a deeper correction, possibly to 1.2700 or so initially. 

A big week for GBP as Thursday's MPC meeting will show any further change in sentiment over the bias (on timing more than anything else).  Rising inflation rates have clearly been exchange rate led, but with the economic prospects still very much in the balance, a reversal in last year's 25bp cut is not the clear cut answer.  We still feel the BoE misjudged the pre-emptive move last summer, so there is an element of having backed themselves into an unnecessary corner. Tentative signs that CPI is softening already, with the latest data showing the yearly rate backing off 2.9% and saving the statutory letter to the Chancellor.

Will this be enough to keep the rate hawks at bay?  5-3 was the vote split at last month's meeting, and we may need some retraction here if Cable is to give up some of the bid tone which sees us pushing further into the mid 1.3100's.  1.3170-90 the next area to watch here.

This is also being helped by the strong defence in EUR/GBP ahead of 0.9000.  This proved a strong sticking point in November last year, but sellers will be getting a little nervous as pullbacks are finding strong buying interest below 0.8900.

Even though the robust nature of the UK at present is proving supportive against an ailing USD, Brexit uncertainty and the positive mood in Europe should see EUR/GBP dips well contained for now.  Worrying were the comments from chief EU negotiator Barnier that he had no clear idea on UK policy on a number of issues, so the focus on hard or soft Brexit could start to fade as traders focus on the overall capabilities of the government as it stands in getting the UK the 'best deal' at the negotiating table. 

Services PMIs are due out on the morning of BoE announcement day, and preceded by manufacturing on Tuesday and construction on Wednesday.

It is also a busy one for Australia, as the RBA meet to deliver their latest assessment on the economy.  The last meeting was a little more cautious than some had expected, though the minutes were taken in a more positive light.  AUD was going through a purple patch as were all the 'risk' currencies, but having pierced the 0.8000 mark, references to the exchange rate and how it may unbalance economic growth will be under scrutiny, as will inflation falling back under 2.0% - marginally so, and still comparatively firmer than elsewhere.  Against this we have seen a strong rise in commodities - Copper rising to $2.90 - but despite scepticism, this will contribute to positive factors as will the healthier jobs market.  Even so, the market has erred towards a more hawkish stance, so the risks here lie to the downside.  AUD may well take another dip lower, but against the USD, the breakout area at 0.7850-35 will provide the first point of support. Higher up, pre 0.8200 is the upper end of the medium term target range, and we do note rule out a push towards these levels, but it will be a slow grind at best.

Plenty of data alongside RBA meeting, with housing and private credit, the AIG manufacturing index, trade and retail sales all due for consideration. 

The RBNZ do not meet up until the week after, but late Tuesday we get the latest employment report, while ahead of this we get the results of the latest Fonterra dairy auctions.  In the meantime, NZD is following the rest of the pack, but looks slightly better supported given another dip back in AUD/NZD.  We still expect to see losses limited below the 1.0500 mark, with only a major fallout in broader risk sentiment prompting greater volatility here.  NZD/USD is still looking to probe higher, but above the 0.7500 mark, the central bank may choose to impart some well chosen words to temper further strengthening. 

Renewed optimism in China's economy has prompted the pick up in commodity prices led by metals, giving the added impetus to AUD and the rest of the Pacific Rim yielders, and we will get more evidence of this (or not) from the official and Caixin manufacturing PMIs on Monday and Tuesday respectively. 

The JPY carry trade is bolstered as a result, but there looks to be some hesitancy across the board, with the USD/JPY rate naturally pressured in the current climate.  Economic activity in Japan is also rising, though at a gradual pace, but enough to prompt upgrades to growth forecasts. The BoJ will maintain their 'whatever it takes' mantra with inflation still way off target, so alongside industrial production forecasts, we also look to the monetary base figures on Wednesday.  110.50-30 support looks set to be tested again but low volatility reinforces this base to a degree, with the high correlation to the VIX underpinning the resilient appetite for risk - irrespective of your views further down the line. 

Strong growth numbers out of Sweden on Friday, which prompted another SEK surge against the USD, but this proved short lived initially before the greenback was hammered again late on.  NOK/SEK also took a tumble from above 1.0300 to a little shy of 1.0200, then also recouped, so SEK buyers need to be selective here, and as we started out in the preview, CHF looks to be the obvious choice for now.  Oil prices are bolstering the NOK as much as the Norges bank stance, though we should see the Riksbank starting to abandon their uber cautious tone in light of the latest data, so we see 1.0350-60 capping the cross rate for now.  PMIs the only standout readings to watch for next week.