by George Dorgan
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Headlines Week July 17, 2017
On June 27, Draghi told the audience at the annual ECB Forum that transitory factors were holding back inflation.
This has boosted the euro against both USD and CHF.
Our opinion, however, is that this “transition” is very long, possibly comparable to the Japanese deflation/ low-inflation over decades.
At the latest from December/January 2017/2018, the EUR/CHF must go down again.
FX
The EUR/CHF remained over 1.10 in the last week, thanks to hawkish comments from ECB president Draghi.
Why must EUR/CHF go down again?
The graph shows that the European Core Consumer Price Index has spiked.Many investors also hoping that the ECB will start reducing their bond purchases.
Speculators are now long EUR against both USD and CHF.
We see core inflation at 1% to 1.3% for the whole year. Headline figure should dive to 1% or lower, once oil price changes are reflected. This should happen in December or early next year.
French Elections: May 2017
The pro-European politician Macron has won the French elections. He is a politician that – similar to Hollande four years ago – promises economic improvements, more investment, more jobs.
As opposed to Hollande, he also advocates limitations on salaries and less social protection for workers, to restore France’s competitiveness.
Mostly probably he will fail – similar to his predecessor because the French economic reality is simply different.
His success moved the EUR/CHF up to 1.0980, mostly caused by FX speculators.
But serious investors – i.e. not FX speculators – did not follow the political event. The SNB had to intervene for 1.9 bn francs.
Serious investors are far more interested into monetary policy and not in politics. And there things remained clear for us: Draghi continues to be dovish, no ECB rate hike in sight.
And so the EUR/CHF must go down again.
Headlines After the Trump Election
We explained the Trump reflation trade, where the Swiss Franc acts as the usual inflation hedge against the obviously inflationary policies of Trumpeconomics.
Trump is about tax cuts – i.e. a fiscal deficit up to 10%, and about protectionism. Trump would restrict global trade and push up U.S. wages.
According to Lars Christensen Trumpeconomics is also about monetary stimulus: Trump would push for a more jobs and a dovish Fed, same as his fellow Republican Nixon did. He could even replace the “hawk” Yellen.
Long-term oriented investors have realized that. They bought Swiss Franc cash as inflation hedge or Swiss Franc pharma stocks that profit on less pharma regulation under Trump .
They got the francs far cheaper than during the coming inflationary cycle, because the SNB sold them at cheap prices. When exactly inflation will start is still open, Bill Bonner asks “Too early for an inflation Bet?”
We see the euro at 0.90 CHF and the dollar at 0.80 – 0.70 CHF during the inflation period, but we are still one or two decades away. (See The two phases of CHF appreciation). During the period of low inflation in between, both dollar and stocks may improve.
Sight Deposits: The SNB intervenes for 2.9 billion CHF after 4.8 bn. last week. Rising stock markets let her believe that she can earn enough until the inflation period starts, for us the end-game of the dollar.
FX: Both SNB and speculators are short CHF.and they are slowly driving the euro towards 1.08.
Headlines October, 2016
Sight Deposits: +1.1 billion CHF
FX: The EUR/CHF is still in the SNB intervention range between 1.08 and 1.0850.
Headlines September 2016
Sight Deposits: +1.6 billion CHF
FX: Unusual price movement caused by SNB Q3 Window Dressing? EUR/CHF rises in one day from 1.0819 to 1.919 by 100 bips.
Dovish Fed, “The case for a hike had strengthened, Yellen said, but still the consensus to hike was not there”. As usual, both EUR and USD depreciated against CHF.
Headlines August, 2016
FX: Not convincing U.S. jobs numbers, that may delay a Fed rate hike.
Sight Deposits: The SNB had to intervene for 4.4 bln.
Headlines July, 2016
FX: US Q2 GDP only +1.2%
Speculative Position: Speculators reduced their long CHF position to 946K contracts.
EUR/CHF at 1.0868 and EUR/USD at 1.1058
Headlines June 04, 2016, After Brexit
Interventions:
The SNB intervenes for 6.3 bn francs in the week ending last Friday, the week one after Brexit.
20% of the interventions into stocks: The SNB has now a 20% equities share, this implies that the bank pumped 2 billion francs in global (non-Swiss) stock markets.
FX: Unexpectedly for us, the SNB raised the intervention level to 1.0850. Apparently the central bank converted GBP->CHF flows into GBP->EUR flows – via EUR/CHF purchases.
Speculators: are long CHF 10K contracts against USD versus 6.3K contracts last week. (CFTC data)
Intervention levels are too high, in particular on dollar purchases
The SNB converts a certain percentage of the inflows into USD to keep up the USD share at around 33%. Dollar purchases at 0.97 CHF are far too expensive in a historical (e.g. 0.75-0.80 CHF in 2011) and future perspective (when global inflation comes back). Similar to the EUR purchases at 1.40 in 2010, dollar purchases at elevated levels of 0.97 can pave the way for a SNB bankruptcy.
Headlines June 20, 2016, Before Brexit
FX: CHF remains strong. Reasons are:
- Brexit fears,
- the weak US Payroll report and the FOMC reaction to it: U.S rates to remain low for longer
- A strong recovery of the Swiss economy, visible e.g. in the Swiss Manufacturing PMI
Sight Deposits: SNB intervenes for 2.6 billion francs.
Speculative position: Speculators switch to long CHF and short USD.
Headlines May 2016
Speculative position: Reduction in CHF Longs against USD: +3900 compared to +9265 x 125K contracts still at the end of April.
Sight Deposits: SNB intervenes for 2.9 bn. CHF in one month. This is a slow-down against before but still strong.
FX: The EUR/CHF is finally weakening falling downwards from initially 1.11. The dollar has had a strong momentum and rose to 0.98.
Headlines April 2016
Speculative position: Speculators are even longer CHF: +9410x 125K contracts.
Sight Deposits: SNB intervenes for 6.4 bn. CHF in only three weeks. Sight deposits (aka debt) are rising by 1% per month, this is 12% per year. The SNB can never achieve such a yield on investment. This is the higest level since January 2016. Why the SNB is driving the Swissie so high is a question, given that both real money and speculators are long.
FX: EUR/CHF rose over 1.09 and touched 1.10. The dollar around 0.97 CHF.
Headlines March 2016
Speculative position: Strong shift to CHF long: +4967x 125K contracts after the Fed reduced their expectations of rate hikes for this year.
Sight Deposits: SNB intervenes for 6.1 bn. CHF during the month of March. This is the higest level since January 2016.
FX: EUR/CHF rose over 1.09 and touched 1.10. As I expected last week, the EUR/CHF was not reached. The dollar is getting slowly weaker, at 0.96 CHF currently.
February 2016
Interventions of 5.1 bn. CHF is very high. The speculative position against CHF was getting smaller and smaller.
January 2016
Interventions +4.8 bn. per month.
Headlines December 2015
End December: The SNB seems to have sold foreign FX, because sight deposits have fallen by 0.5 billion CHF in December. However, many people withdraw cash at the end of year, this reduces sight deposits at Swiss banks and therefore also sight deposits at the SNB. According to the SNB, this is for tax reasons.
The speculative position USD against CHF has evaporated in the meantime. Traders are net long CHF again.
Early December: Height of a speculative position against euro and CHF (short 24K contracts on Wednesday). Draghi disappointed. And logically the speculative position against EUR and CHF started to unwind. For the first time in months, sight deposits fell. The SNB was able sell currency reserves, most probably dollars, while the speculators had to buy francs.
For Older Headlines see next page
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