Yuan's SDR Inclusion, Swiss KOF Disappoints
Swissquote Bank Ltd | Nov 30, 2015 08:46AM ET
Forex News and Events
Yuan to get included to the SDR
Even if the ECB and the US Nonfarm payrolls will gather the entire market’s attention this week as the IMF is expected to include the renminbi in Special Drawing Rights Basket. The Chinese currency will therefore join the USD, the EUR, the GBP and JPY in the IMF’s basket. The question now is to determine the weight of the yuan in the basket. If the IMF uses the present formula, which is supposed to capture the prominence of the currency in terms of international trade and national foreign exchange reserves, the Chinese currency will probably get a weighting of around 15%, which is more than both the pound sterling (11.3%) and the Japanese yen (9.4%). However, many expects the IMF to modify the formula when including the yuan, which would lower its weighting at around 10%. The effect of the inclusion are already priced in, nevertheless in the case in which the IMF decides to decrease the influence of the export/import in the formula, which would results in a lower final weight for the yuan, we may witness a depreciation of the Chinese currency.
However, one thing is certain. The PBoC will have to move toward the internalization of the yuan, meaning that the central bank will have improve the yuan’s liquidity - widening the trading band will a first step - but on the long-term, the PBoC will have to move toward a free-floating currency.
Mixed Data in Japan
Japanese industrial production has been released at 1.8% month-on-month, meaning a 4 month consecutive rise even considering that the data was released below expectations. However, the annualized level of industrial production is still negative and has worsened from September to -1.4% y/y vs -0.8% y/y on September. This data seems mixed and the current positive monthly trend may be strictly temporary as business investment remains at a low level, certainly caused by the declining Japanese population and by the fact that investors are more attracted by overseas investment opportunities.
Another key data for assessing the current monetary policy in Japan are the retail sales, which printed well above expectations at 1.1% m/m and 1.8% y/y, led by the sales of clothes, food and drink. For years, retails sales were a weak point of the Japanese economy. At some point, with the massive easing, we are awaiting inflation to pick up to confirm that the recovery is actually happening. We remain bullish on the USD/JPY, as we expect more supportive data. Japan has a structural issue to solve with an aging population. Shinzo Abe is trying to push more people to keep on working longer. This will be necessary to save the Japanese economy.
Swiss KoF disappoints
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As we anticipated, the stimulus effect of weaker CHF has faded with a strengthening CHF. With the stronger CHF has come a slower outlook for economic activity. The November KOF Economic Barometer dropped to 97.9 (100.2 expected read) from a revised higher 100.4, meaningfully below its “long-term average.” The deceleration of the barometer was driven predominately by negative data from Swiss manufacturing activity and export related indicators. Clearly the Swiss economic is struggling with the CHF appreciation shock. Earlier, Swiss sight deposits came in basically unchanged at chf468.6bn from chf468.3bn. The lack of expansion suggests that speculation over SNB intervention was erroneous. With heightened expectations for the ECB to over deliver easing at their policy meeting Thursday, the CHF has been appreciating against its primary trading partner. In addition, Friday Swiss CPI is expected to remain in deflationary territory at -1.3% from -1.4% in October. The SNB is now caught between a rock and a hard place. With the CHF strengthening and inflation and growth indicators pointing to further deterioration, the central bank will be forced to act. We anticipate that the SNB will respond to the ECB with their own deeper interest rates cuts accompanied with a tightening of exemptions thresholds, verbal intervention and direct FX intervention. Given the SNB aggressive history of inflicting the most damage with actions, traders will remain nervous and quick on the trigger over any CHF moves, as we saw last Friday. We remain bearish on the CHF over expectations for the SNB to act.
The Risk Today
EUR/USD EUR/USD is now holding below 1.0600 and remains in a downtrend channel. The technical structure is clearly negative. Hourly support lies at 1.0566 (intraday low). Hourly resistance can be found at 1.0763 (19/11/2015 high). Stronger resistance stands at 1.0897 (05/11/2015 high). Expected to break support at 1.0566. 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).
GBP/USD GBP/USD has broken, as expected, hourly support at 1.5027 (06/11/2015 low). Hourly resistance is given at 1.5336 (19/11/2015 high). Strong resistance can be found at 1.5529 (22/09/2015 high). Expected to show continued 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.
USD/JPY USD/JPY is trading without real momentum. Hourly resistance is given at 123.76 (18/11/2015 high). Support is located at 122.23 (16/11/2015 low). Expected to fall back to the 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).
USD/CHF USD/CHF is still pushing higher and is still trading around its five-year high. Hourly support is given by the lower bound the uptrend channel around 1.0200 while hourly resistance is given at 1.0328 (intraday high). The technical structure still suggests that the upside momentum should continue. 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.
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