What's Going To Affect EUR, USD And CHF? Ebury Weekly Analysis: Euro (EUR), US Dollar (USD), Swiss Franc (CHF)
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EUR
The retreat of the ECB doves in the face of inflationary reality accelerated last week, as the hawkish Dutch member of the council suggested that not only is a July hike a near certainty, but a 50 bp hike could be on the cards. This is happening at the same time US short term rates are having trouble pushing higher, partially because so much is priced in on the part of the Federal Reserve. As a result, interest rate differentials across the Atlantic have shrunk and are no higher now than in March. This trend should be supportive for the euro and we may have already seen the bottom.
This week’s PMIs should be strong and partially assuage recession fears in the US, enabling the ECB to continue its policy turnaround and focus squarely on containing inflation.
USD
Strong retail sales last week confirmed that so far there is little sign that higher prices are doing much to deter the US consumer. However, it is a volatile indicator and one cannot extract a lot of information from a single print. US yields fell in sympathy with stocks, and for now the US dollar seems to have recoupled to rate differentials with the rest of the world, so it fell as well.
On tap for this week is the publication of the minutes for the last meeting of the Federal Reserve, which we expect to reiterate that the next two hikes are likely to be “doubles”, i.e., 50 bp. However, all of this is already priced in by markets, and it will be difficult for US short term rates to price in any more. We think the dollar is vulnerable to a sustained pullback here.
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CHF
The Swiss franc outperformed all other G10 currencies by a significant margin last week, rallying by close to 3% against the US dollar on growing speculation about monetary policy tightening in Switzerland.
SNB president Jordan suggested on Wednesday that the bank was ready to act should an inflation threat materialise. Investors might have been further encouraged to bet on a shift in the SNB’s approach by a hawkish ECB, which looks ready to kick-start its rate hike cycle in July. We think that the market is perhaps a bit too aggressive, and think that the SNB would likely prefer to increase currency interventions in the near-term, before thinking about rate increases. While interventions have been relatively limited, suggesting a degree of acceptance of the currency’s strength in light of elevated inflation, the bank still seems determined to not allow the franc to appreciate too much.
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We believe the scale of the franc’s recent rally has been excessive and think it may give up some of its gains, particularly if global sentiment improves. That will be the focus for the franc this week, namely the PMI prints from the main economies, news from China, and behaviour of global equity and bond markets.
