Forex News and Events
SNB’s sight deposits edge lower
As expected, a “no” vote from the Italian constitutional referendum has squeezed investors out of European assets as risk-off sentiment takes over. As usual, the Swiss franc was one of the first to rise against the single currency on spillover from heightened tensions in the eurozone. The recent appreciation of the Swiss franc suggests that market participants are almost immune to economic developments in Switzerland and focussed exclusively on the safe-haven status of the currency.
Last week, the Q3 GDP report released by the State Secretariat for Economic Affairs showed that economic growth was lifeless in Switzerland as exports contracted (goods exports -0.2%q/q and services exports -0.8%q/q) and household consumption increased marginally (+0.1%q/q). On a year-over-year basis, the Swiss economy expanded 1.3% in real terms, compared to 2% in the second quarter and 1.1% in the first. Moving forward, we expect the Swiss economy to remain under significant pressure as the eurozone, its main economic partner, faces a significant year ahead, one full of political uncertainty. This environment should translate into persistent franc strength which should keep pressure on EUR/CHF and the SNB “on the alert”.
This morning, EUR/CHF opened down 0.80% to 1.0698, completely erasing last week gains. However, the single currency quickly reversed losses and returned to its initial level - at around 1.0790 - as the euro recovered on a broad basis. Indeed, it is tempting to say that the SNB has stepped in once again to protect the Swiss franc but given the broader recovery amongst EUR crosses, we see it as a market correction rather than an SNB intervention. SNB sight deposits were released this morning, showing that the SNB stayed sidelined last week with total sight deposits edging lower to 527.5bn from 527.6bn in the previous week, while domestic deposits fell to 5.4bn from 457.6bn.
Italy says no, Italian banks set to suffer (temporarily)
As we predicted on Friday, it was clear to us that against a backdrop of global crisis, Italy would defy its government and not allow it the chance to apply European austerity policies. Matteo Renzi has made a wise decision by announcing his dismissal as he does not represent what Italians want.
Some are calling this the third surprise of the year after Brexit and Trump’s election. There is a definite pattern here. It is certainly not the case that Italians do not want any change but what is sure is that they fear the possibility of becoming the new Greece.
Italian banks will suffer in the next few days as markets begin to price in the lower likelihood of a bailout. From our point of view, the bailout will happen regardless as the Eurozone simply cannot allow the Italian banking sector to collapse, especially as this would have consequences for other European institutions.
The single currency is at such a weak point that with every new referendum, rumours of tension and collapse resurface. This is a trend that will weigh heavily on the Eurozone throughout 2017.
However, the tensions felt by the single currency are ironically helping the European Central Bank in the currency war against the US dollar. This morning one euro is trading at 1.06 dollar. At Thursday’s ECB meeting Mario Draghi will certainly announce an extension of its QE programme beyond March 2017.
Buy CNY on Optics
The US President-elect’s Twitter feed became active again forcing investors to further adjust. Just as Vice President-elect Pence was finally able to cool diplomatic tensions by minimizing Taiwan President Tsai Ing-Wen’s congratulatory phone call to Trump, the situation was enflamed by a late night tweeting session. The President-elect tweeted: “Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into... their country (the U.S. doesn’t tax them) or to build a massive military complex in the middle of the South China Sea? I don’t think so!”.
The rhetoric has increased our expectations for Trump to brand China as a currency manipulator and to move forward with a 45% tariff on Chinese exports. Two narratives continue to evolve. The first being Trump’s aggressive stance and actions towards China (unlike optimism towards Russia) and the second, a basic disregard for diplomatic protocol. Both narratives will have significant ramifications in financial markets moving forward. RMB was basically unchanged from Friday’s FIX. Borrowing rates in Hong Kong for CNH continue to surge higher. Given the mounting worries over a US-China trade war, heavy selling of RMB should be expected. We suspect that the PBoC is intervening to increase the overnight borrowing rate in order to discourage further RBM liquidations. Overnight, CNH-HIBOR rates surged to 12.4%, levels not seen since Sept/Oct. As for USD/CNY, watch for stabilization and even appreciation, as China who is worried about optics, will deflect exchange rate criticism heading towards Jan 20th. In broader EM terms, outflows have slowed after two weeks of large rotation from EM into DM funds. In a contrarian trade we would be short USD/CNY heading towards Jan 20th.
EUR/JPY – Monitoring Resistance At 122.01. 
The Risk Today
EUR/USD is trading mixed amid the Italian referendum. Hourly resistance is given at 1.0686 (29/11/2016 high). Support can be found at 1.0506 (intraday low). Expected to show renewed bearish pressures. In the longer term, the death cross indicates a further bearish bias despite the pair has increased since last December. Key resistance holds at 1.1714 (24/08/2015 high). Strong support given at 1.0458 (16/03/2015 low) is on target.
GBP/USD's bullish momentum is growing. Hourly resistance at 1.2674 (11/11/2016 high) has been broken. Hourly support is given at 1.2302 (18/11/2016 low). Expected to further monitor strong resistance at 1.2271 (05/10/2016 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 bullish momentum is definitely on. The pair is now monitoring strong resistance given at 114.87 (16/02/2016 high). Hourly support is given around 111.36 (28/11/2016 low). Stronger support lies at 108.56 (17/11/2016 low). Expected to see another upside move We favor 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 is still moving sideways. Key support is given at the parity. Hourly resistance lies at 1.0205 (30/11/2016 high). Expected to see further monitoring of the resistance area around 1.0200. 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.
