FX MARKETS STABILISE PRE-FOMC MINUTES, SWISS UNEMPLOYMENT INCREASES

  • Today traders will look for possible new clues about the potential increase of the bond programme from ECB’s Praet’s speech in Mannheim, Germany, later this afternoon
  • Fed minutes are expected to deliver more insight on why the Fed decided to put its credibility at stake in deciding to leave interest rates unchanged
  • EUR/USD is trading in a low volatility environment and is holding ground around 1.1250.
  • Today’s data continues to suggest that the Japanese economy is decelerating, adding to the likelihood of more stimulus from the BoJ on the 30th of October
  • AUD/USD – there is still room for further Aussie appreciation in the short-term but we remain cautious as the rally may be short-lived
  • Switzerland unemployment rate climbed to 3.4% in September from 3.3% the month before, although the recent EUR surge should provide a boost to the Swiss economy in the coming months
  • We do not think that the Swiss National Bank is ready to cut interest rates at the next December meeting
  • We think that the SNB will first lower the target account balance to which it applies negative interest rates
  • EUR/CHF is holding ground slightly below the 1.10 threshold as it continues to move sideways around 1.0950
  • Looking for a safer haven, USDCHF is targeting 0.9600 against the backdrop of a constant delaying Fed rate hike
  • In UK, the BoE minutes will be a non-event as the majority of MPC’s members will likely vote to maintain rate at 0.50%
  • GBP/USD is currently testing the resistance level at around 1.5321. On the downside, the cable will find support at 1.5108

The Japanese current account surplus narrowed less-than-expected in August from ¥1,808.6bn to ¥1,653.1bn (versus ¥1,226bn expected). Machinery orders (considered as proxy for capital expenditure) fell 5.7%m/m in August, well below market expectations for an increase of 2.3%m/m and the previous month’s contraction of 3.6%m/m. Recent data continues to suggest that the Japanese economy is decelerating and today’s data adds to the mounting possibility of more stimulus from the BoJ on the 30th of October. Data triggered a mini sell-off in Japanese equities with the Nikkei 225 and the Topix index falling 0.99% and 0.79% respectively. USD/JPY continues to move sideways.

In mainland China, stock exchanges reopened after the Golden Week holiday and tried to play catch-up. However, the mixed performances of other Asian regional markets undermined Chinese investors’ optimism. The Shanghai Composite climbed “only“ 3.14%, while its tech-heavy counterpart, the Shenzhen Composite, rose 4.15%. Elsewhere, Hong Kong’s Hang Seng fell 1.11%, South Korea’s Kospi rose 0.68%, and in Taiwan the Taiex fell 0.58%, while in Singapore shares edge down 0.52%.

AUD/USD is taking a breather around $0.72 after a 1-week rally during which the Aussie appreciated as much as 4.30% against the greenback on improving risk sentiment. However, AUD/USD fell 0.80% overnight as investors took their profits home. In our opinion, there is still room for further Aussie appreciation in the short-term but we remain cautious as the rally may be short-lived. Indeed, the prevailing optimism is disconnect from the region’s fundamentals. In New Zealand, the same story applies, the Kiwi rose as much as 5.70% against the US dollar over the same period and fell 0.77% since then. The closest resistance can be found at $0.6709 (high from August 21st).

In Switzerland, unemployment rate rose to 3.4% (s.a.), matching market’s expectations, from 3.3% a month earlier. Usually, September is a good month for the Swiss economy as companies start to hire again after the summer break. However, it seems that the global uncertainty together with the strong Swiss franc are crippling the Swiss economic machine. EUR/CHF is holding ground slightly below the 1.10 threshold as it continues to move sideways around 1.0950.

***YannQuelenn, Market Analyst: “After disappointing inflation data earlier this week, the seasonal adjustment unemployment rate printed this morning at 3.4% in September from 3.3% the month before. While we cannot consider the labour market to be in danger, the abandoning of the floor, coupled with global turmoil did create some downside pressures for the job market. It is clear that the Swiss economy is steadily declining and GDP concerns are growing, especially when we realize that the EU accounts for almost two thirds of Swiss exports. Indeed, European growth is still at stake. Nevertheless, the recent EUR surge should provide a boost to the Swiss economy in the coming months, as there are some lags for an economic change to be correctly reflected in the economy.

The next SNB meeting will be held in December. We do not think that the Swiss National Bank is ready to cut interest rates. This would only serve to even further punish investors under the current declining economic conditions. It is also clear that the SNB is closely monitoring the European Central Bank monetary policy. By constantly dropping hints that quantitative easing will be increased, Draghi will force the SNB to react and therefore to defend the Swiss Franc. We think the SNB’s first move will be to lower the target account balance to which negative interest rates are being currently applied. For the time being, only accounts in excess of CHF 10 million are being targeted.

Last but not least, as the IMF mentioned the global outlook remains weak, the CHF is reclaiming its safe haven status despite the economic Swiss difficulties. The USDCHF is targeting 0.9600 against the backdrop of a constant delayed Fed rate hike.” ***

In Europe and the US, we are heading into a busy day! The Fed will release the minutes of its September 16-17th FOMC meeting. The minutes are expected to deliver more insight on why the Fed decided to put its credibility at stake by leaving interest rates unchanged. EUR/USD is trading in low volatility environment and is holding ground around 1.1250.

In UK, the BoE minutes will be a non-event as the majority of MPC’s members will likely vote to maintain rate at 0.50% (8-1 in favour of no-change at the previous meeting). GBP/USD is currently testing the resistance level implied by its 200dma at around 1.5321. On the downside, the cable will find support at 1.5108 (low from October 1st).

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