SNB moves to higher risk assets on weaker EUR threats

The Euro-zone deflation deepens faster-than-expectations. The January CPI estimate prints 0.6% contraction year-on-year, while the core inflation is now expected to ease from 0.7% to 0.5% y/y. Deflation combined to Grexit fears are certainly no good on EUR-complex in mid-run. In the short-term however, the immediate reaction remains limited as bad news were already broadly priced in.

Technically EURUSD is ready to step in the bullish consolidation zone amid last week’s post-ECB QE squeeze is now digested. While the uncertainties vis-à-vis the Greek political situation remains a heavy weigh on the EUR-complex, a close above 1.1460 (MACD pivot / former support) is needed for fresh bull signal, given the fragility of the EUR-sentiment. The mid-long term view remains comfortably negative, short-term corrections are good opportunities to strengthen long-term EUR short positions.

The selling pressures on EURGBP ease as the Cable comes under pressure unexpectedly. AsGBPUSD tests 1.5000 psychological support on numerous reasons, the surprise pick-up in UK mortgage approvals signal that the housing market may recover over months ahead (a quite GBP-positive info). The improvement is obviously due to 10 basis point fall on effective interest rates on mortgages. As the real economy reacts to low rates, we expect limited downside in the short-term GBPUSD sell-offs.

SNB shifts toward more risky FI assets

EUR/CHF’s spike above 1.05 at Swiss open fueled speculations that the SNB might be behind the move. The money markets show limited reaction, we see no particular stress on euroswiss interest rate futures. As EURCHF tops, real money names and business owners will increasingly be tempted to sell EUR verse CHF on futures and derivatives markets to set FX hedges vis-à-vis the risky EUR. Therefore we expect choppy upside at 1.05/1.10 area.

The impact of EURCHF debasing is heavily felt in Swiss everyday life. The grocery shops, supermarkets, furniture, clothing shops give sensibly high discounts in order to prevent clients from buying across borders. This being said, the labor market is now under important contraction pressures. In the canton of Geneva, the negotiations for 50% unemployment are already on the wire. We expect significant price adjustment in the real market over the months ahead, which in turn should cool-off buying pressure in franc.

Official data shows SNB’s EUR reserves increased from 45% to 46% as of end-4Q; A-rated fixed income assets rose significantly from 3% to 10%, verse AA-rated FI holdings (down from 29% to 22%). The SNB will likely expand its risk tolerance in order to compensate losses due to further EUR weakness. We would not be surprised to see the SNB shifting from EUR holdings to non-EUR, higher yielding fixed income assets to diversify its portfolio risk now that there is no more constraint on the EUR/CHF.

USD/CHF tests 200-dma (0.9288). Trend and momentum indicators suggest that post-SNB correction is coming to an end as the pair steps into bullish consolidation zone. For a week close above 0.9141 (Fibonacci 61.8% on January 15th drop), we see further upside potential toward 0.9551 (Fib 74.6%). The 25-delta risk reversals are still negative across the curve, yet should normalize above the zeroline given the Fed’s diverging outlook from its G10 peers.

Swissquote   Published on January 30, 2015, 00:00 GMT  www.swissquote.com/fx