Waiting On The Fed, SNB On hold
Swissquote Bank Ltd | Sep 17, 2015 07:23AM ET
New Zealand GDP disappoints
New Zealand’s Q2 GDP came in on the soft side earlier this morning just a week after the RBNZ cut the OCR by 25bps to 2.75% in an attempt to boost growth. The Kiwi economy expanded by only 0.4%q/q (seasonally adjusted) while market participants were looking for an expansion of 0.6%q/q; however it is still better than the previous quarter during which the economy grew 0.2%. Data showed that agricultural production increased 3% after contracting 2.3% in the first quarter. The mining industry grew 2.5% - after a contraction of 7.8% in the March quarter - as extraction in oil and gas increased. Exports were badly hit, particularly due to low dairy prices, and contracted 1.1%. However, it seems that there is light at the end of tunnel as dairy prices have begun to recover since mid-August. The country can also depend on strong growth in the tourism sector as a cheaper currency makes New Zealand more attractive to tourists.
All in all, we see that the market underestimates the impact of low commodity prices and a weak global demand on the Kiwi economy. A weaker New Zealand dollar will definitely help the country to address those issues. However, we believe that the RBNZ will rather wait, firstly, to get more data before moving on with another rate cut as the economy still needs to digest the last cut and persistently low commodity prices. We anticipate the Kiwi to continue depreciating over the coming weeks, mostly against the pound and the Aussie.
All eyes on Fed
After months of discussion, markets will have all eyes on the FOMC rate decision tonight. The probability of a rate hike has been going up and down for the last three months and Bloomberg estimates a current probability of an upside move of around 32%. There are still big uncertainties concerning the Federal Reserve Monetary Policy as recent data has come in mixed over the last few months. A rate hike will push down inflation which remains very low. It has been just under a decade since the U.S economy has been all-in, coupling massive quantitative easing with a zero-interest rate policy. We believe that this policy has not delivered the anticipated results.
In the case of a rate hike, the consequences promise to be significant especially for the emerging markets, which are likely to suffer. Hence they will keep their fingers crossed as commodity prices become more expensive and most trades in the world are denominated in U.S. dollar. Concerning stocks, we think that a rate move will drive global equity markets higher and would put an end to the era of cheap money. However, we think that is not be the case for the time being and it appears that current investor sentiment shows fears that world equity markets might be over-valued.
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In any case, the story is not going to stop. We think that the next FOMC Committees in October and December will become the new starting/perfect moment for a rate move. Nonetheless, we are starting to question the ability of the Fed to succeed in its mandate of stabilizing price and securing full employment. And as we see it confidence is what makes a central bank reach its objectives.
SNB on hold
The SNB Monetary policy assessment of 17th September was rather a dull affair but provided further confirmation that the CHF should weaken further.
As expected the SNB held 3-month Libor target rate at -0.25 to -1.25%. The interest rate on sight deposits with the SNB remains at –0.75%. According to the SNB, the Swiss franc is “significantly overvalued, despite a slight depreciation” and “remains active in the foreign exchange market as necessary.” Basically, the SNB has toed the company line. Inflation was decreased 0.2% points to −1.2%; due primarily to a fall in oil, while growth has picked up slightly, yet the environment remains challenging for many companies due to CHF appreciation.
Perhaps the most interesting aspect of the monetary policy assessment was the sentence: “negative interest rates in Switzerland and the SNB’s willingness to intervene as required in the foreign exchange market make investments in Swiss francs less attractive; both of these factors serve to ease the pressure on the franc”. This clearly gives an official blessing to FX traders to sell CHF. In addition by reminding the markets of negative interest rates it potentially indicates that should CHF remain overvalued, further cuts in rates can be expected. Yet the SNB remain aware that there are risks with CHF weakness, suggesting that “economic developments in China” and “turbulence in the international financial markets” could impact monetary global policy. We suspect that the SNB is overly optimism on its growth forecast (just dodged recession) and underestimates the structural changes sparked by the perpetually strong CHF. SNB Thomas Jordan, recent suggested that policy rates have not touched the “absolute bottom”, so there is possibility to cut more needed (and possibly expand cuts across sight deposit). We remain vigilant for potential ECB action on interest rates and a pre-emptive response by the SNB.
The lack of further policy action sparked a relief rally in CHF. USD/CHF fell to 0.9674 while EUR/CHF dropped to 1.09472, however no meaningful technical levels were damaged. We anticipate a reversal of this knee-jerk reaction and further weakness in the CHF. Despite solid current account surplus and large gold reverses, traders no longer see the CHF as the primary safe haven trade of choice (this honor now goes to USD and JPY), but rather the funding currency of choice.
The Risk Today
EUR/USD is moving higher. Hourly resistance is now given at 1.1438 (01/09/2015 high) and stronger resistance lies at 1.1714 (24/08/2015 high). Strong support can be found at 1.1017 (18/08/2015 low). In the longer term, the symmetrical triangle from 2010-2014 favored further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support). We have broken the resistance at 1.1534 (03/02/2015 reaction high). We are entering an upside momentum.
GBP/USD is pushing higher and is challenging the resistance implied by the upper bound of the uptrend channel. Hourly resistance at 1.5509 (27/08/2015 high) has been broken and hourly support is given at 1.5330 (15/09/2015 low). Stronger support is given at 1.5165 (04/09/2015 low). In the longer term, the technical structure looks like a recovery bottom whose maximum upside potential is given by the strong resistance at 1.6189 (Fibo 61% entrancement).
USD/JPY is moving in either direction around the 200-day moving average. Hourly support is given at 118.61 (04/09/2015 low). Stronger support can be found at 116.18 (24/08/2015 low). Hourly resistance can be found 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 118.18 (16/02/2015 low).
USD/CHF has failed to hold above 0.9700 and is now pushing lower. Hourly support is given at 0.9668 (14/09/2015 low). Hourly resistance lies at 0.9903 (11/08/2015 high). On the very short-term term, the technical structure is setting lower highs. However we remain bullish in the medium-term. 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).
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