19 Nov – FOREX Comments
Daily FOREX Comments
The USD, which remains less than 1% away from its March cyclical high, dipped shortly after the release of the FOMC October meeting minutes yesterday afternoon. The minutes were not as hawkish as the FOMC post meeting statement implied as “several” participants warned about the downside risks to US inflation and the global economic/financial outlook. The minutes also indicate that the shift in the language in the October post-meeting statement pointing to a potential rate hike in December was because members “wanted to convey” that liftoff “may be appropriate” at that time, barring “unanticipated shocks”.
Nonetheless, the USD uptrend is intact as the FOMC is on track to lift rates in December (currently only 60% discounted) particularly following the strong October US employment report and pick-up in inflation. Interestingly, the FOMC minutes notes that beginning the “normalization process relatively soon would make it more likely that the policy trajectory after liftoff could be shallow”.
USD/JPY upside was limited because BoJ decided to stay on hold. Our strategy is to sell USD/JPY on rallies above 124.00. The JPY will be supported by Japan’s large current account surplus approaching 3% of GDP.
AUD/USD and NZD/USD edged lower yesterday on USD strength and weak commodity prices. There are no major economic data releases in Australia and New Zealand today, so AUD and NZD will largely be driven by external developments
EUR/USD continues to be weighed down by rising expectations of more ECB policy action and the increasingly negative Eurozone-US two-year swap spread (now -104bps, near its mid-2007 lows). Monetary policy divergence between the ECB and the Fed will continue to push Eurozone-US two-year swap spread further into negative territory. The ECB’s October meeting minutes are released today and will likely highlight the extent of the discussion on more monetary easing measures.
GBP/USD lifted early in the Asian session, but has since drifted back.
We continue to think a better measure of the BoE’s reaction function is the UK growth/inflation projections assuming constant rates. In our view this points to a lift in interest rates in mid-2016.
The outlook for higher UK interest rates should continue to support GBP on the crosses, particularly against the EUR, NZD and CAD. October UK retail sales were weaker than expected as an expected unwind of the Rugby World Cup induced spike is now actually happening. However, the lift in clothing prices in the CPI report suggests the risk is the “value” of retail sales does not decline as much as anticipated.
USD/CHF is up near its highest level since the Swiss National Bank (SNB) removed the EUR/CHF floor in mid-January. The firmer USD and prospect of more ECB policy action have lifted USD/CHF. The prospect of another ECB deposit rate cut has raised the risk and expectation the SNB will push its 3-month LIBOR target rate further into negative territory (currently -0.75%). The SNB’s next policy meeting is on 10 December, one-week after the ECB.
We would expect the SNB to react to more policy action by the ECB. As per the comments from SNB President Jordan today, negative interest rates target the overvalued CHF.
The firmer USD outlook, and widening US-Swiss rate differential should continue to support USD/CHF near term.