CHF up on risk-off; UK short-term indicator day

Rates as of 05:00 GMT


Market Recap

It’s unusual to see CHF at the top of my daily list of trade-weighted indices. The currency just isn’t that volatile nowadays. I’ve been trying to find some reason but it’s difficult to understand, which is to say that I have no idea. It doesn’t seem to be related to any specific news – Swiss unemployment and sight deposits out yesterday showed no particular reason for the currency to appreciate. Yet USD/CHF started to move down virtually from the start of business in London until 16:30 GMT, i.e. throughout the European day, only levelling off then. It’s probably a “risk off” move related to the poor performance of European stocks yesterday, which were down across the board, as were US stocks last night and Asian stocks this morning, mostly.

There may also be some speculation about the Swiss National Bank (SNB) keeping policy on hold when it meets on Thursday, which I think is about 99.99% likely. While the Swiss overnight index swap (OIS) curve has moved up and down over recent months, it’s always been quite flat, and indeed if anything has flattened more recently – the 1m rate is -0.72% and the 2 yr rate is -0.73%, i.e. no change at all expected in the next two years. Given the general trend among central banks now to move to a “wait and see” posture, it would be no surprise to anyone if the SNB continued with its current stance, which has been in place since January 2015.

Looking at the table at the bottom of this report, which shows the movement of various currency pairs, it’s unusual to see CHF/JPY at the top (or bottom). Nowadays the two currencies often move together (more or less) on a “risk on, risk off” move, and rarely move that sharply against each other.

Usually, but not always. Since the beginning of 2018, USD/CHF and USD/JPY have moved together 70% of the time, which also means they’ve moved in opposite directions 30% of the time. As you can see from the regression line, usually the movement in USD/CHF is less than the movement in USD/JPY – the formula says USD/CHF tends to move 55% of the movement of USD/JPY.

Of the times when the two don’t move together, there’s no real trend as to which way they go. It’s pretty evenly distributed between CHF up/JPY down (15%) and CHF down/JPY up (13%).

It’s especially inexplicable to see CHF/JPY moving up so much today, because there was a huge move in the JGB market overnight – 10-year yields soared back to zero for the first time since March! (I’m being a bit sarcastic here – everything is relative. However the move back to zero was significant.) This was up from -0.014% at the close of business Monday. Even a zero yield is attractive in a world where many bonds have a negative yield. Since then however the 10-year yield again plunged back into negative territory (-0.025%) which I guess does show that zero attracts buying.

The risk-off move may have been caused by increasing tensions between US and North Korea. Trump tweeted over the weekend that North Korean leader Kim Jong Un was “too smart and has far too much to lose” if he renewed hostility with the US. In return, state-run Korean Central News Agency called Trump “an old man bereft of patience,” which is hard to argue with. I think there may be more such insults thrown back and forth, but I’d doubt if it’s in anyone’s interests to start bombing people, so I don’t expect any actual escalation.

Cable was little changed with just two days left before the election. A poll yesterday from ICM for Reuters showed the Conservatives with only a 6 percentage-point lead over Labour, down 1 ppt from the previous poll on 2 December. This is unusual as most polls show a double-digit lead for the Conservatives. YouGov will publish another election model tonight – the last one, two weeks ago, showed the Conservatives winning a 68-seat majority, but Labour has gained somewhat since then. This poll carries a lot of credibility as it was correct in 2017 when most other polls were wrong, so it will be closely watched again tonight.

I think that while a Conservative victory is largely priced in, there’s still some uncertainty and we are likely to see the pound gain further – temporarily — if and when these predictions come true. However I’m not so optimistic about GBP next year, when the reality of the task ahead of Britain comes home to roost.


Paul Volcker obituary

FYI Paul Volcker, Fed Chair during the 1980s who tamed inflation for the Western world, died yesterday. In a field congested by charlatans, political hacks, lackeys for the elite and people whose whole career consists of making up excuses to enrich themselves and their sponsors, he was a model of probity and disinterestedness, a true public servant. I remember hearing a story about him after leaving the Fed having to be convinced to take a taxi instead of the subway – much less a limo. You can read about him at


Today’s market

The big event today is UK short-term indicator day, which is usually a big deal for Britain. That’s when the monthly GDP figure, the trade data, and industrial & manufacturing production are all announced. However, two days before the election these key data may not affect the market as much as it usually would.

But since I get paid by the word, let’s go through them in any case. The GDP data – the most important – are expected to be miserable. GDP is forecast to rise 0.1% mom, which is pathetic after three consecutive months of decline. The 3m/3m change is forecast to fall to zero – stalling. GBP negative if indeed anyone is paying attention, which they may not be.

The UK trade figures are expected to show the visible trade deficit narrowing a bit, but still remaining wider than the recent trend. The total trade deficit however is expected to be almost exactly on trend, which I imagine would be neutral for GBP.

The country seems to have run down the excess inventories that it started building up in the months running up to last March, when Brexit was supposed to happen. It’s now probably returning to the kind of trade balance that it had up until Q3 of last year. A pity that, because if indeed Brexit does happen on schedule on 31 January, what’s going to happen? Won’t they need those extra inventories that they accumulated earlier in the year? I wonder if we’ll see a huge spike in the December or January figures.

UK industrial production is expected to be up slightly. On the one hand, the fastest mom growth in seven months. On the other hand, +0.2% mom is still kind of pitiful, especially after such a slew of disappointing figures. And manufacturing alone is even worse – that’s not expected to grow at all this month.

The ZEW survey of analysts and pundits shows people think the current situation has improved a bit, and also that their expectations about the future have improved, too. So net net, the improvement that they’re expecting remains pretty high – a level that we haven’t seen on a sustained basis since 2013. The difference between then and now however is that back then, things were good and were expected to get even better, while now, things are crummy and they’re just expected to get OK. That may be achievable. EUR positive

In the US, the monthly survey from the National Federation of Independent Businesses (NFIB) is expected to show another increase in the optimism of small businesses. That would accord with what the U of M and Conference Board are finding about consumers, too. Their “hiring plans” index, which is released earlier, also showed an increase. If both consumers and business are optimistic, why shouldn’t FX traders? USD bullish

Overnight, Japan announces its producer price index (PPI). The market seems to react more closely to the surprise in the month-on-month number than the year-on-year number, so that’s the one to watch. Surprisingly though the reaction of USD/JPY is usually the reverse of what you might expect: the pair generally rises when the figure beats estimates, i.e. the yen tends to weaken when prices rise faster than expected, and vice-versa. That’s probably because the Tokyo stock market tends to rise when the PPI rises faster than expected — it means better pricing power for companies — and USD/JPY tends to move in line with the stock market, not with any anticipation of Bank of Japan policy, which as everyone knows is basically on hold for the rest of this geological age. In that respect, the rise in the PPI, although modest, at least is a rise, and the yoy rate of change will exit from negative territory. That may be seen as good for companies, hence positive for USD/JPY too.




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