The combination of a strong recovery in the Euro and the rise in yields on the sell-off in government bonds is seeing Swiss franc longs desperately crowding for the exits. Is the CHF rally done?
The flipside of the Euro spiking higher for several days running and bond markets selling off steeply over the same time frame is a weak Swiss franc, as lazy longs are all rushing for the exits at the same time on the latest developments. Despite EURUSD’s strong rally, the EURCHF rally has been even more vicious, (so USDCHF has bounced significantly as well) evidence that the isolated Euro bearish trade on the EuroZone sovereign debt question have been even more focused in the EURCHF cross. The situation went into overdrive yesterday as rate spreads rushed wider. Clearly, positioning was not ready for this move as the trade had become one-sided (as is always the case for any chart that looks EURCHF's or USDCHF's of late).
There’s always the risk of sudden change of direction, however, as soon as the next round of Euro worries sets in, as long as that is also accompanied by a fall in bond yields. Until then, there may enough of a positioning excess to drive the franc weaker for a time – especially if we have a look at USDCHF versus the rate spreads (see below). Still, at some point, the SNB will need to come up with a way to think and act outside of the box if the situation with the strong franc doesn’t resolve itself soon. Today's steep drop in the Swiss manufacturing PMI may be a sign that the strong franc is finally doing some damage to the Swiss economy.
There’s always the risk of sudden change of direction, however, as soon as the next round of Euro worries sets in, as long as that is also accompanied by a fall in bond yields. Until then, there may enough of a positioning excess to drive the franc weaker for a time – especially if we have a look at USDCHF versus the rate spreads (see below). Still, at some point, the SNB will need to come up with a way to think and act outside of the box if the situation with the strong franc doesn’t resolve itself soon. Today's steep drop in the Swiss manufacturing PMI may be a sign that the strong franc is finally doing some damage to the Swiss economy.
Chart: USDCHF versus 2-year rate spread
The recent leg of additional CHF strength was a pure expression of EuroZone fear, a trade that is now rapidly being unwound in the face of the sudden introduction of the “euro relief” trade. Looking over at USDCHF shows how the franc strength was vastly distancing itself from the normal correlation with rate spreads and shows how much upside potential there may be if a lid is kept on Euro fears for a time and if the old correlation re-establishes.
Odds and ends
Japan’s core inflation in May reached above 0% for year on year comparisons for the first time since late 2008. In fact, since 1998, that core level only reached above 0% for a few months in 2008. Is there a sea change in the inflationary regime? This bears watching in coming months due to the debt load the island nation carries. The Tankan survey was out worse than expected, but due to the infrequency of the data, it is hardly useful data, and some of the other Japanese data has bounced more than expected in May, though the general growth picture is hardly encouraging, particularly given signs of further slowdown in China.
EURUSD reached and found resistance at its final arguable “retracement” area at 1.4550, which is the 0.764 Fibo of the move from the 1.4698 top to the recent low. To the downside, the most immediate areas of interest are the recent high at 1.4440 that was breached yesterday and the 55-day moving average a bit lower at 1.4405. A close below there today or Monday might give the bulls a bout of doubt for the near term as the footing remains uncertain in today’s range of trading.
Looking ahead
Evidence suggests that the market has completely changed its mind about the lay of land over the last several days – as equities, the Euro, and other signs of risk appetite have screamed higher from recent lows – mostly it seems on a sell the rumor, buy the fact reaction to the Greek bailout situation rather than any other discernible theme. In the coming trading days, we’ll see whether the market decides if anything has really changed here (not from where we sit – and how much of the upside in risk appetite was due to benchmark chasing as the quarter drew to a close and the like?)
Yesterday’s US Chicago PMI was the first of the big three regional manufacturing to register a strong reading after catastrophic Empire and Philly Fed readings. What will this mean for today’s ISM manufacturing reading – unchanged?
Remember that this is a long weekend for the US, which is off celebrating its independence day on Monday. Next Tuesday we have the German Constitutional court’s proceedings getting underway. This court certainly is on the ball, as the discussion at the court will be about the May 2010 bailout package for Greece and whether it violates the “no bailout” clause of the German and European constitutions. It’s a bit uncertain what a negative vote would mean, though it is certain that such a vote will demand an answer from politicians, just as Euro politicians will have to answer at the polls in coming election cycles.
Also next week we have the US ISM non-manufacturing survey on Wednesday and the US Employment Report on Friday. Next week is a heavy one for the Aussie economic calendar, with Building Approvals and Retail Sales data up Monday, Trade Balance data and the RBA rate decision on Tuesday (the year forward expectations have rocketed from -5 bps to +20 bps during this bout of risk enthusiasm over the last few days.), and the employment report on Thursday.
The Riksbank will also be out with its rate decision on Tuesday (25 bp hike to 2.0% expected) and the Bank of England and ECB are up with their respective meetings on Thursday, with expectations shifting to a majority now looking for a 25-bp increase from Trichet and company. Year forward expectations for the ECB are all the way back to almost 75 bps today. The BoE doeesn’t usually issue a statement unless they are going to announce further QE measures – and it’s too early for that just yet.
Stay careful out there and have a great weekend.
Economic Data Highlights
- Australia Jun. AiG Performance of Manufacturing Index out at 52.9 vs. 47.7 in May
- Japan May Overall Household Spending out at -1.9% yoY vs. -1.7% expected and -3.0% in Apr.
- Japan May Jobless Rate dropped to 4.5% vs. 4.8% expected and 4.7% in Apr.
- Japan May National CPI out at +0.3% YoY vs. +0.2% expected and vs. +0.3% in Apr.
- Japan May National CPI ex Food/Energy out at +0.1% YoY vs. 0.0% expected and -0.1% in Apr.
- Japan Q2 Tankan Large Manufacturers Index out at -9 vs. -7 expected and +6 in Q1
- Japan Q2 Tankan Non-manufacturing Index out at -5 vs. -4 expected and +3 in Q1
- China Jun. PMI Manufacturing out at 50.9 vs. 51.5 expected and 52.0 in May
- Australia May HIA New Home Sales out at -0.2% MoM vs. +0.2% in Apr.
- China Jun. HSBC Manufacturing PMI out at 50.1 vs. 51.6 in May
- Sweden Jun. Swedbank PMI Survey out at 52.9 vs. 55.5 expected and 56.1 in May
- Norway Jun. PMI out at 56.1 vs. 57.0 expected and 56.8 in May
- Norway Jun. Unemployment rate steady at 2.5% as expected
- Switzerland Jun. PMI Manufacturing out at 53.4 vs. 57.8 expected and
- 59.2 in May
- UK Jun. PMI Manufacturing out at 51.3 vs. 52.3 expected and 52.1 in May
- EuroZone May Unemployment Rate out unchanged at 9.9% as expected
Upcoming Economic Calendar Highlights (all times GMT)
- US Jun. Final University of Michigan Confidence (1355)
- US May Construction Spending (1400)
- US Jun. ISM Manufacturing (1400)
- US Jun. ISM Prices Paid (1400)
- China Jun. Non-manufacturing PMI (Sun 0100)
- Australia May Building Approvals (Mon 0130)
- Australia May Retail Sales (Mon 0130)
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