Switzerland shifts to the right, China GDP above forecast

Forex News and Events

Prospect of GBP rally (by Peter Rosenstreich)

UK house price inflation weakened in October at its slowest pace since 2010. UK’s Rightmove house prices rose 0.6%m/m in October following gains of 0.9% in September (5.6% y/y in October eased from 6.4% y/y growth). Last week soft UK CPI sent GBP bulls running. The BoE MPC has highlighted the need for core inflation to increase before considering policy normalization. So when September core inflation data showed it unchanged at 1.0% y/y (plus negative reads in the headline number), investors ran to the hills. Despite expectations for the first rate hike in 2017, we see room for a GBP upside. While consumer inflation is subdued, wages are moving at a quicker pace. The unemployment rate is now at 5.4%, wage growth rose to 3.0% - the fastest pace since 2009 (ex-bonus 2.8%). Both in steady bullish trends. In addition, data from the general economy shows it is performing well. This week’s retail Sales are expected to increase by 0.3% in September but expectations are skewed to the upside. Given the constricted front end of UK yields, a small increase in inflation will have an outstripped reaction in the GBP. We remain constructive on GBPUSD in this scenario.

In regards to EURGBP at this week’s ECB rate decision we are expecting a slightly dovish shift in communications. With disinflation entrenching and PMI expected to weaken further the ECB must act to keep the reflation story going. Despite Draghi confidence in the current strategy and Coeure suggestion that ECB policy is not a cure-all, economic data indicates that more stimulus is need. This meeting should being to prepare the market for additional assets purchase. The reaction in the FX markets should be EUR weaker in the G10 but a source of support for EM currencies that are relying on the low borrowing cost.

Switzerland shifts further to the right

In what was not a completely unexpected result the populist Swiss People's Party or SVP increased its position as the nation’s largest part. The SVP had campaigned on an anti-immigration platform which has become a hot-button topic for the Swiss above the ailing economy. The reaction was a slightly weaker CHF against the USD and EUR. Given the contentious nature of refugees in Europe currently, Switzerland anti-immigration stance will not be seen in a positive light. Likely increasing tensions between Switzerland and its largest trading partner and neighbor Europe.

China’s GDP above expectations (by Arnaud Masset)

Data from China continues to be the main driver of global stock markets. However, last night’s mixed data from the world’s second biggest economy failed to provide a clear catalyst for equity markets across the globe. It was a choppy session in Japan and China, with stocks ending in negative territory in Tokyo, while investors failed to find a clear direction in China. European equities are edging higher. On the data front, China’s third quarter GDP, which printed at 6.9%y/y versus 6.8% consensus, showed that the economy is more resilient than anticipated by the market; in spite of a change in the calculation method, which is aimed at improving accuracy by allowing to better account seasonality and short-term fluctuations.

However, the industrial sector remains under a lot pressure as the economy continues to adapt to the new norm of slower growth, shifting toward a domestic generated growth from an export driven one. In September, industrial production grew 5.7%y/y, below market’s expectations of 6%y/y. Nevertheless, in spite of this mixed data, we think that the worst is over and that China will start to get some colour back as the PBoC continues to act to ensure a soft lending. However, we believe that bad news from the manufacturing sector and the housing market is yet to come as further downward adjustments are necessary to reach equilibrium levels. We anticipate the PBoC to ease further through another cut in the benchmark rate and additional downward adjustments to the reserve requirement ratio (RRR).

Fed: Hawkish vs Dovish (by Yann Quelenn)

The power struggle between the Fed’s dovish and hawkish members continues. Lael Brainard, dovish, and Jeffrey Lacker (Hawkish) will speak later today. It has been said that major divergence is first and foremost an ideological divergence. The hawkish members are strong believers of the Phillips curve, which states that there is an inverse relationship between inflation and unemployment. Better jobs data should provide inflation as there will be more competition for jobs, which would push wages higher and therefore consumption higher.

On the dovish side, there is the belief that the Phillips curve does not truly reflect reality and that there should be an additional “reserve army” of workers, which is not accounted for in the official data. Indeed, these workers gave up seeking unemployment since they lost their jobs. Therefore doves maintain the idea that job conditions are not sufficient for judging the inflation outlook. Nevertheless, these workers should flow back in the jobs market once economic conditions improve and for the time being no reserve army are coming back in. NFPs have confirmed this fact. Over the past two months NFPs have printed below expectations with a very weak read in September at 142k new jobs, while consensus expected at least 50k more.

From our vantage point, we believe that the jobs data effectively underestimates the true reality of the jobs market but we think that the U.S rate hike does not only depend on some economic concepts but also on Yellen’s credibility. The Fed’s Chairwoman is a hawkish member and while she still does not see any improvement in U.S. inflation, her credibility is at stake and a small rate hike could happen while conditions are not perfect, we think it would even be an error. This would show that her economic ideology actually prevails over other members and that dissidents remain a small minority.

The Risk Today

Yann Quelenn

EUR/USD is still in a bullish momentum. Hourly resistance for a short-term bounce is given at 1.1495 (15/10/2015 low). The mid-term buying interest is still strong. Other resistance can be found at 1.1561 (26/08/2015 low). Support lies at 1.1087 (03/09/2015 low). Expected test of the resistance at 1.1561. Since March 2015, the pair is improving. Key supports can be found at 1.0458 (16/03/2015 low) and 1.0000 (psychological support). The technical structure favours an eventual break higher. Strong resistance is given at 1.1871(12/01/2015)

GBP/USD remains in a range between support at 1.5078 (05/05/2015 low) and resistance at 1.5659 (18/09/2015 high). A long as prices remain in this range, there is no clear mid-term momentum. In the longer term, the technical structure looks like a recovery as long as support given at 1.5089 stands. A full retracement of the 2013-2014 rise is expected.

USD/JPY has strengthened but has failed to break the higher bound implied the downside channel. Hourly support can be found at 118.07 (15/10/2015 low). Strong resistance is given at 121.75 (28/08/2015 high). A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).

USD/CHF is pushing slightly higher. Hourly resistance can be found at 0.9740 (07/10/20150 low). Hourly support is given at 0.9476 (15/10/2015 low). Expected challenge of the support at 0.9746. In the long-term, the pair has broken resistance at 0.9448 suggesting the end of the downtrend. This reinstates the bullish trend. Key support can be found 0.8986 (30/01/2015 low).

Resistance and Support: