What is wrong with the Swiss CPI?

Forex News and Events:

In Switzerland, the softness in CPI readings continues raising doubts on whether these numbers are endorsed the right interpretation. Given the SNB’s ultra-loose monetary policy, it is quite surprising to detect down trending consumer prices. Today’s newsletter will dig into the Swiss market to understand the weakness in consumer prices and the SNB’s obsession with the franc strength despite the alarming big picture. Does the Swiss inflation really stagnate, or does the CPI measure omit important inputs by construction?

The Swiss inflation has been flat-to-negative in January reading. The consumer prices decreased at faster pace of -0.3% in January (vs. -0.2% a month ago), while the CPI y/y remained unchanged at 0.1%. The EU-harmonized numbers showed faster drop in Swiss consumer prices, with -0.6% drop m/m.

While the softer consumer’s basket prices are supportive of SNB’s ultra-expansive monetary policy to fight CHF strength, the real estate market is still an important issue, unjustifiable left aside. Indeed, the higher real estate prices and more expansive rents inevitably weigh on private consumption budget. There is no surprise in fading CPI given that the Swiss citizens’ purchasing power weakens due to high rents/home prices. The UBS real estate bubble index advanced to 1.23 in 4Q, the highest since September 1991. In fact, an average Swiss citizen allocates 25-30% of his/her salary to rent a house. The SNB’s macro-prudential measures, such as higher capital requirements for mortgages, only narrow access to home ownership. The latter keeps the upside pressures tight on the home rents. It is time to face the reality, the softness in CPI data do not reflect the real basket of consumption of an average Swiss citizen by excluding the most significant expense: the rent. In this respect, we believe that the SNB will soon need to face a policy decision to ease tensions in the real estate market.

The Sunday’s referendum to limit immigration has perhaps been a sharp expression of the discomfort within the Swiss population. The deterioration in purchasing power, higher rents/real estate prices and the tightening labor market resulted in 50.3% of Swiss voters saying “stop to free circulation”. The decision directly aims lower immigration believed to relieve pressure from the already tight labor market, thus to normalize wages and inflation levels. We have our reasons to believe that the macro-fundamentals will sooner or later weigh on SNB’s decision to carry CHF 443bn worth foreign reserves. The mid-long term suggests stronger CHF.

In the shorter run, USDCHF sees resistance at 0.8984/0.9000 (50-dma / psychological level). The technical picture suggests the extension of the weakness for a daily close below 0.9075 (according to MACD analysis on 12-26 day). Next level of supports are placed at 0.8900/03 (January support & downtrend bottom), 0.8833 (Dec 17th low), 0.8800 (2013 low).

EURCHF remains offered at 1.22500/600, while the technical picture prints improvement since recovery from Feb 3rd – 4th double bottom (0.218500). The MACD will step in the bullish zone for a daily close above 1.22450, option bids are seen above 1.22500. Resistance should keep the upside limited at the daily cloud cover (1.22808/1.22953).

Today's Key Issues (time in GMT):

2014-02-12T12:00:00 USD Feb 7th MBA Mortgage Applications, last 0.4%
2014-02-12T14:00:00 CAD Jan Teranet / National Bank HPI m/m, exp. 0.0%,last 0.1%
2014-02-12T14:00:00 CAD Jan Teranet / National Bank HPI y/y, last 3.8%
2014-02-12T14:00:00 CAD Jan Teranet / National Bank HP Index, last 159.29

The Risk Today:

EURUSD weakened yesterday close to the resistance at 1.3685 (50% retracement), making an intraday bearish reversal. A break of the hourly support at 1.3609 would negate the short-term positive structure. Another hourly support lies at 1.3552. A key resistance stands at 1.3739. In the longer term, we favour a broad horizontal range between 1.3296 (07/11/2014 low) and 1.3893 (27/12/2013 high) with a bearish bias. As a result, a gradual decline towards the low of this range is favoured. A first key support is given by the 200 day moving average (around 1.3396).

GBPUSD has moved above the resistance at 1.6446 (see also the declining trendline). Another resistance is at 1.6519. A break of the hourly support at 1.6383 is needed to negate the short-term technical structure. Another support can be found at 1.6302 (07/02/2014 low). Today's release of the BoE's inflation report is likely to increase intraday volatility. In the longer term, the technical structure favours a bullish bias as long as the support at 1.6220 holds. However, monitor the recent technical deteriorations (break of the support at 1.6305 (25/12/2013 low)) given the general overbought conditions. A major resistance stands at 1.7043 (05/08/2009 high).

USDJPY has broken the resistance at 101.77, validating a double-bottom with an implied target at 102.77. Hourly resistances can be found at 102.94 and 103.44. We favour a short-term positive bias as long as the hourly support at 101.99 holds. Another support can be found at 101.25 (06/02/2014 low). The corrective phase is close to a key support area given by the 200 day moving average (around 100.13) and 99.57 (see also the rising trendline from the 93.79 low (13/06/2013)). As long as these levels hold, a long-term bullish bias is favoured. A major resistance stands at 110.66 (15/08/2008 high). Last Friday's intraday decline stopped our long strategy.

USDCHF remains weak despite yesterday's bounce near the support at 0.8932. Hourly resistances lie at 0.9022 (see also the declining trendline) and 0.9082. Another support can be found at 0.8903. From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase which has potentially reached completion. The support area defined by 0.8931 (24/02/2012 low) and 0.8833 favours a potential medium-term base formation. A key resistance stands at 0.9250.

Resistance and Support: