Swiss Unemployment Unchanged, MXN To Underperform EM FX
Swissquote Bank Ltd | Aug 09, 2016 06:49AM ET
Forex News and Events
Switzerland: Good jobs data but…
There were no major changes in Swiss unemployment data, which remained stable at 3.1% in July and 3.3% when seasonally adjusted. After peaking at 3.6% in February, there was fear of a growing upside momentum, which finally did not happen. Nonetheless, there are two things worth noting:
Firstly, the franc remains largely overvalued (one euro is currently trading below CHF 1.09) and the true impact this has on the economy still needs to be assessed. For example, it is common knowledge that Swiss watch exports are suffering even though this does not necessarily translate in the statistics. Indeed, Switzerland has protectionist measures in place and several cantons are providing allowances to companies finding themselves obliged to reduce their employees’ working hours. As a result, we can expect the unemployment rate to increase within the next year.
Secondly, the Brexit vote is still too recent for anyone to properly appraise the implications for the Swiss economy. For the time being it has forced the SNB to massively intervene to defend the swissie, which has increased its balance sheet. At some point, a monetary expansion program could also be required to help Switzerland fight in this currency war. We feel that it is therefore too soon to congratulate ourselves about such low unemployment data. In our view, higher unemployment rates would raise deflation issues and as a result cause the SNB to take a step forward.
Broad EM rally but fading MXN strength
Reaffirmation that global central banks will remain dovish for the foreseeable future, with the obvious exception of the Fed, has supported risk and yield seeking. Investors have piled into EM FX with MXN the clear outperformer in recent days, despite the peso generally lagging in the indiscriminate risk rally. In EM FX MXN has been one of the worst performing currencies of the year-to-date, due to its high correlation to oil and the general preference of investors to demonstrate a negative EM strategy through the peso (low cost of carry). Comments by Qatar’s minister of energy & industry, Al-Sada, suggesting that OPEC will tighten supply, which pushed oil up 3.0% could be the jumpstart a MXN rally needs. However, economic weakness and broader macro headwinds should restrain MXN bulls. Within LATAM we are negative MXN and would fade recent strength.
Domestically, private sector consumption has driven growth, yet persistently low oil prices will steadily erode consumer confidence. Externally, the US presidential election, remains at the forefront of concern. Republican nominee Trump’s address at the Detroit Economic Club highlighted the end of NAFTA. A US exit from the trade deal would damage all nations involved but be especially negative for Mexico.
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A reported 11.8% y/y rally in Mexico auto productions highlights potential risks to growth. Today’s economic data should indicate further divergence between softening growth and higher inflation. Mexico will release 2H July CPI data which should put annual inflation up 2.7% and core at 3.0%. Industrial production later this week should tick-up marginally, in-line with improvements in US growth, to 0.5% from 0.4% y/y. Despite rising inflation, Banxico is likely to shadow the Fed’s actions. Since Banxico has already pre-emptively raised rates by 100bp alongside the Fed normalization path, the central bank has a bit of room to maneuver. We anticipate Banxico to hold the overnight target rate at 4.50% unless the Fed acts or MXN depreciates too quickly.
USD/CHF - Increasing But Volatility Declines.
The Risk Today
EUR/USD is slightly weakening. The road is wide-open towards hourly support can be found at 1.1046 (05/08/2016 low). Hourly resistance is given at 1.1105 (08/08/2016 high). Expected to further decline. In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD continues to weaken. The pair is now trading below 1.3000 and is heading towards support implied by the lower bound of the downtrend channel around 1.2900/20. Hourly resistance can be located at 1.3097 (08/08/2016 high). 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's short-term buying pressures seems to slow around hourly resistance given at 102.83 (02/08/2016 high). The short-term technical structure remains nonetheless negative and a failure to go above 102.83 would indicate a continued medium-term bearish momentum. Hourly support is given at 100.68 (02/08/2016 low). We favour 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 continues to bounce from hourly support given at 0.9634 (02/08/2016 low) while strong resistance is given at 9956 (30/05/2016 high). Volatility is very low and should indicate that this short-term bullish momentum is at stake. 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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