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FX Daily, October 25: Germany IFO, Dollar Going Nowhere

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EUR/CHF

The SNB might have been behind the jump from 1.08 towards 1.823 in the last two days.

EUR/CHF - Euro Swiss Franc, October 25 2016

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EUR/CHF - Euro Swiss Franc, October 25 2016

. Source: Investing.com - Click to enlarge

GBP/CHF

The pound had started the week looking more upbeat against the Swiss Franc but soon came under pressure just before Bank of England Governor Mark Carney met with a House of Lords committee about Brexit. There was a sudden 1% fall in the price of sterling in the minutes prior to the meeting which highlights how precarious the pound remains in this Brexit period of great uncertainty.

This Thursday sees UK Gross Domestic Figures for the third quarter which should absolutely be in everyone’s diary as the one to watch!

Judging by today’s market reaction to Mark Carney’s comments then my view is that we should see more of the same on Thursday. The GDP numbers will represent the first quarter of economic growth post referendum which is what every commentator is waiting for. These numbers are of huge interest for all commentators and there will inevitably be a lot of “I told you so!” from EU ‘Remainers’ and the ‘Brexiteers’. There is a lot of doom and gloom at the moment with respect to these numbers although I am more optimistic. Clients selling Swiss Francs may wish to capitalise on the attractive prices now ahead of Thursday.

I believe there will be a small but noticeable decrease in economic growth but nowhere near as bad as many are predicting. My view is that these figures have the potential to come in considerably better than expected which could create some upside for the pound. Whilst major gains are somewhat hampered by Brexit uncertainty there could be a good short term spike to become available.

GBP/CHF - British Pound Swiss Franc, October 25

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GBP/CHF - British Pound Swiss Franc, October 25

. - Click to enlarge

FX Rates

The US dollar has been confined to extremely narrow ranges against the euro, yen, and sterling. To the extent that there is much action in the foreign exchange market, it is with the dollar-bloc and emerging market currencies.

The Canadian dollar was whipsawed by comments from the Bank of Canada. A reference to waiting for 18-months initially sent the US dollar from near CAD1.3380 to CAD1.3280. As Governor Poloz clarified his remarks, linking the reference closing the output gap rather than monetary policy per se. It recovered to CAD1.3360 before consolidating.

FX Performance, October 25 2016 Movers and Shakers

FX Performance, October 25 2016 Movers and Shakers

. Source: Dukascopy - Click to enlarge

Higher metal prices, including a 6% rally in iron ore, a record high in coking coal, and a five-year zinc may have provided the latest excuse to buy the Australian dollar. It is the strongest of the majors today, gaining around 0.4% against the greenback. It has traded on both sides of yesterday’s range but is likely to hold below the key $0.7700 cap that has marked the upper end of the range over the last several months, ahead of the Q3 CPI to be reported in early Sydney on Wednesday.

The higher metal prices are also helping lift the South African rand. It is the strongest of the emerging market currencies today, gaining 0.65% against the US dollar. On the other hand, the South Korean won is the only emerging market currency outside of the Chinese yuan that has slipped against the US dollar today. The 0.2% decline in the won comes despite a preliminary Q3 GDP that was a little better than expected. The 0.7% quarter-over-quarter growth was a little better than expected, though off from the 0.8% expansion in Q2. The year-over-year pace was 2.7%, again slightly better than expected, but off the 3.3% pace since in Q2. Next exports were a drag.

FX Daily Rates, October 25 (GMT 15:00)

FX Daily Rates, October 25

. - Click to enlarge

Perhaps the weakness of the yen has acted as a drag on the Korean won. The yen is the weakest of the majors after the Canadian dollar. The US dollar is knocking against the highs from earlier this month near JPY104.65. That is the highest level since late-July. Since the early in the Asian session, the dollar has been in a JPY104.35-JPY104.45 range for the most part.

The driving force is the rising US rates and increased expectations that the Fed will hike rates in December. The CME and Bloomberg calculations put the odds of a hike before the end of the year around 68%-70%. The odds are roughly double what they were a year ago at this time. The US-Japanese 10-year spread is near 184 bp, the upper end of where it has been since the UK referendum. The US 2-year premium over Japan is near 110 bp, which is also among its best levels since Q2.

FX Performance, October 25

FX Performance, October 25

. - Click to enlarge

Germany

The driver is the same for the euro, with an additional twist. The market is more confident that the ECB will extend its asset purchases in December than it is about additional measures by the BOJ this year. The US-2-year premium over Germany is near its best levels since the financial crisis, and the 10-year premium is near the largest since Q1.

Yesterday’s stronger than expected flash eurozone PMI was unable to do more than steady the euro in its seven-month trough. Today’s recovery in the German IFO survey barely elicited a reaction from the single currency. It has been confined to less than a third of a cent within yesterday’s ranges. Some buying has emerged in the $1.0870 area for three sessions now. However, lower highs are being recorded, and the euro has been unable to resurface above $1.09 since the European session last Friday.

Germany Business Expectations, October 2016

Germany Business Expectations, October 2016

. Source: Investing.com - Click to enlarge

The IFO business climate (current assessment and expectations) improved more than expected (110.5 vs. 109.5 in Sept) and is at its highest level in 2.5 years. The Bundesbank warned that the slowdown in Q3 was temporary. The recent data lends support to this optimism.

Germany Ifo Business Climate Index, October 2016

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Germany Ifo Business Climate Index, October 2016

. Source: Investing.com - Click to enlarge

United States

The US economy also appears to have begun Q4 on a positive note, but the NY Fed GDP tracker warns of another quarter of sub-2% growth.

U.S. CB Consumer Confidence, September 2016

(see more posts on U.S. Consumer Confidence, )
U.S. CB Consumer Confidence, September 2016

. Source: Investing.com - Click to enlarge

Yesterday’s flash Markit manufacturing PMI rose to its highest level in a year. The October Empire State manufacturing survey did disappoint, but the Philadelphia survey was better than expected.

U.S. Manufacturing PMI October (Early Estimate: Flash)

(see more posts on U.S. Markit Manufacturing PMI, )
U.S. Manufacturing PMI October (Early Estimate: Flash)

Source: Investing.com - Click to enlarge

Today the Richmond Fed reports alongside the S&P Core Logic (formerly Case Shiller) and the Conference Board’s measure of consumer confidence. The September reading was at new highs since the crisis, and a small pullback would not be surprising. Lastly, Atlanta Fed’s Lockhart appears to the be the last Fed speaker ahead of the blackout around next week’s FOMC meeting.

S&P / Case Shiller House Price Index YoY, October 2016

(see more posts on Case-Shiller house prices HPI, )
S&P / Case Shiller House Price Index YoY, October 2016

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Graphs and additional information on Swiss Franc by the snbchf team.

Full story here
Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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