Brazil's inflation to rise above 10% in November

Forex News and Events

Brazil: inflation expected to rise above 10% in November (by Arnaud Masset)

In Brazil, inflation pressures had most likely remained strong in November. According to the latest survey, economists expect inflation to have accelerated to 10.42%y/y in November compared to 9.93% in October. However, as reported by the latest BCB’s weekly economist survey, price levels are anticipated to reach 10.44% by year-end, before easing to 6.70% by the end of next year. We stand among the less optimistic as we believe that the actual political turbulence, which increased recently amid impeachment proceeding against Dilma Roussef, will delay the economic recovery and will maintain the pressure on the Brazilian real. The real come under renewed selling pressure as risk-off sentiment kicked investors out of emerging currencies. USD/BRL rose to 3.80 in Sao Paulo yesterday. We expect the pair to trade sideways, ahead of next week’s Fed meeting, between 3.65 and 3.95.

China’s demand for steel is collapsing (by Yann Quelenn)

There is one indicator which makes us wary that China’s current crisis may be deeper than anticipated. We find ourselves now questioning the logic that China’s economy is in transition. According to a report from the Chinese Industry, steel demand will decrease substantially by 4.8% in 2015. Even worse, the outlook for 2016 is that demand is expected to decline by 3%. As a result an increasing number of small Chinese companies are closing down.

Overall, the manufacturing sector in China has, according to the steel Chinese association, lost more than $11 billion this year. This goes way against the widespread belief that the steel demand would increase exponentially within the next decade as long as emerging countries’ economies were developing. Instead, most EM countries are now facing debt so massive that their own investments are declining.

We now believe that the Chinese economy is now moving toward another type of economy oriented by a domestic sector of services. China is striving to find new growth drivers despite the fact that it would take exponential resources to maintain 10% growth indefinitely. And it is not because the manufacturing sector is declining that China is diversifying its economy, it is because of the lack of growth. The global outlook is negative and western world’s purchasing power is weakening. Most developed countries are indebted at too high a level. And between investment and austerity, Western countries’ officials have made their choice.

SNB will reserve bullets (by Peter Rosenstreich)

Currently we see no adjustment in SNB policy on December 10th (no change in IR and/or tightening of exemption thresholds). Any policy response should be limited to verbal intervention. Prior to the ECB, we had anticipated that the SNB would come out with both guns blazing to defend the CHF (lower depo rate, tighten threshold, FX and verbal intervention). However, the less dovish Draghi suggests the debasement of the EUR is on pause and therefore threat to CHF limited. While CHF still remains significantly overvalued and Swiss economic deterioration worrisome, we expect the SNB to hold off on any aggressive change. Prior actions have been costly (both in terms of financial and creditability) with limited success. Therefore, the SNB will opt to withhold tools until absolutely necessary. Should the CHF appreciate against the EUR and/or economic data continue to erode we would expected the SNB to act. We remain bearish on CHF as interest rate swaps indicate that the CHF is a perfect funding currency while expectations that the SNB will create a psychological floor limited any significant CHF appreciation.

Today, the Swiss Federal elections (Federal Council) are taking place. As we are writing four seats are already decided, with two more expected to be re-elected with little opposition. The seventh seat should be a member of the right wing nationalist Swiss People party (SVP) due to the solid showing (winning the most seats (65) in the 200-seat lower house of parliament) a recent election. The seventh seat was left vacant after Finance Minister Eveline Widmer-Schlumpf decided not to seek a third term. Given the slow momentum and complex deal making system of Swiss politics nothing much should change however, it does indicate a clear shift to the right in Swiss politics.

EUR/CHF - Higher Volatility.

The Risk Today

Yann Quelenn

EURUSD has increased and a medium-term momentum reversal is pretty close. Hourly support lies at 1.0524 (03/12/2015 low). Hourly resistance can be found at 1.0981 (03/12/2015 high). Expected to target resistance at 1.0981. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBPUSD's downside momentum remain lively. The pair has weakened for the second day in a row. Hourly resistance is given at 1.5336 (19/11/2015 high). Strong resistance can be found at 1.5529 (22/09/2015 high). Hourly support can be found at 1.4985 (02/12/2015 low). Expected to show further weakness. The long-term technical pattern is negative and favours a further decline towards the key support at 1.5089 , as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USDJPY remains between hourly resistance at 123.76 (18/11/2015 high) and hourly support at 122.23 (16/11/2015 low). Expected to bounce back from support at 122.23. 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).

USDCHF is now consolidating below the parity after last week's sharp decline. Hourly support is given at 0.9876 (27/10/2015 low) while hourly resistance is given at 1.0328 (27/11/2015 high). Expected to show further consolidation. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.

Resistance and Support: