Swiss FX Reserves Edge Lower, Trade Ideas For 2017
Swissquote Bank Ltd | Jan 06, 2017 05:15AM ET
After hitting a record level in November, the Swiss National Bank’s foreign-exchange reserves shrank for the first time since February, data showed on Thursday. The SNB holds CHF 645.3 billion worth of foreign currencies at the end of December, down CHF 2.5 billion (647.8bn at the end of November). During 2016, the reserves increased by CHF 85.8 CHF, the highest yearly increase since 2012 when they climbed by CHF 172.9 billion. All in all, the data underline the fact that the SNB has once again spent the year fighting to defend the Swiss franc. Given the highly uncertain environment -- Brexit, US elections -- the central bank stuck to its commitment that “it will remain active in the market” and intervene to protect EUR/CHF against downside pressure. Looking at the exchange rate, the SNB policy could be seen as a complete success as EUR/CHF remained roughly above the implicit floor of between 1.07 and 1.08 (rather 1.07 lately).
However, the SNB is ahead of another rough year as mounting political tensions between EU members will likely remain the main driver in 2017. In addition, the Greek crisis will make its comeback this summer as the country will face several principal repayments through the end of the summer. We therefore anticipate that upside pressure on the CHF against the euro will remain acute. Moreover, it seems that the marginal cost to weaken the Swiss franc has been rising lately as the last FX interventions had very little impact. This morning, EUR/CHF was trading sideways at around 1.0710 after moving temporarily below the 1.07 threshold at the beginning of the week.
2017 trade overview (by Peter Rosenstreich)
No EM equity sell-off trigger
Our view of moderate US growth and a lower-than-consensus Fed interest rate path, combined with an improvement in the GDP growth outlook and stability in commodity prices should support emerging-market equity prices. We would focus on AXJ equities as efforts to increase regional trade should separate from protectionist activity in DMs.
We are particularly focused on EM currencies and with global interests still at historically low levels, the search for yields will continue. Higher yielding EM currencies with low correlations to US political uncertainty (i.e. distanced from Trump's Twitter feed rant) will continue to appreciate. HUF, PLN, INR and MYR are all exhibiting a low correlation to US political risk. However, CNY and MXN will continue to bear the brunt of Trump's nascent policies (MXN is particularly exposed on two fronts: trade & immigration).
Czech National Bank’s EUR/CHF moment
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The CNB introduced a EUR/CZK “floor“ at 27 to avoid imported deflation in November 2013. The country's currently improving economic outlook indicates that inflation will reach the bank's 2% target by mid-2017. This is the key condition for returning to a normal monetary policy setting and ending the minimal exchange rate. In their own words, the bank board “still considers it likely that the commitment will be discontinued in mid-2017.”
USD/JPY harbinger
After an impressive run USDJPY has failed to break the strong resistance area between 118-120, stalling alongside US-JP short term yields spread. Consistently, the Nikkei 225 rally has paused. A similar pattern was seen at the beginning of 2016, when USD/JPY collapsed below 100 from 123 and this move also drove Nikkei down 25%. With “Abenomics” nearing exhaustion, telling the limits of fiscal stimulus, further JPY weakness is unlikely, suggesting a likelihood of a sharp correction in USD/JPY and Nikkei 225.
US stocks have upside
The post-election rally is making valuation feel stretched with P/E ratio on S&P 500 at its highest since the dotcom bubble. Yet, corporate earnings growth is forecasted over 10% so there is still further upside potential. Stabilization in growth, an improvement in oil prices and most critically, a continued accommodating monetary policy will be the core drivers. Should Trump find even marginal success, fiscal stimulus, lower corporate taxes and a confident US consumer should push the current bullish rally. Concerning sectors, weaker regulations and idiosyncratic conditions in financials, energy and healthcare should outperform.
Gold - Bullish Pressures Accelerate.
Yann Quelenn
EUR/USD has surged yesterday. The pair now lies above 1.0500. Hourly support lies at 1.0341 (03/01/2017 low). Stronger resistance is given at 1.0670 (14/12/2016 high). Expected to see continued sideways price action in the short-term. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.
GBP/USD has exited downtrend channel. Hourly support lies at 1.2200 (03/01/2017 low) while resistance lies at 1.2388 (30/12/2016 high) has been broken. The technical structure suggests further increase. The break of resistance area around 1.2400 confirms further strengthening. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY has weakened and is moving away from hourly resistance given at 118.66 (15/12/2016 high). Hourly support can be found at 115.07 (05/01/2017 low). Stronger support lies at 114.74 (12/12/2016 low). Expected to see further downside moves. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF is moving sideways between hourly resistance is given at 1.0344 (15/12/2016 high) and 1.0021 (08/12/2016 low). Key support is given at the parity. Expected to further consolidate above 1.0200. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015
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