Note: The weekly Commitments of Traders (COT) report is not being published while the US government is shut down.

Market Recap

A quick glance at the above table shows clearly that the big move over the last 24 hours was CHF, which has plunged against both USD and EUR.

In any event, the move up in USD/CHF and EUR/CHF was fairly steady from the beginning of European trading yesterday, although it appears to be peaking now mid-morning in Asia. We could see some retracement in this sharp move, particularly as investors presumably search for the explanation and come up empty-handed.

Swiss 10-year bond yields, at -0.146%, are ridiculously low, but they were even more ridiculously low at -0.219% at the start of the year, so that’s not the cause. And if it were simply a “risk on” move – as suggested by the rise in AUD – then why is JPY barely affected, particularly as Tokyo stocks are up a robust 1% this morning? Could it be because Trump cancelled his trip to Davos? That’s a plus for the country.

The Swiss National Bank’s share price fell sharply at the opening yesterday after it reported on Wednesday a CHF 15bn loss last year, but it’s still a lot higher than it was before the announcement, for some bizarre reason (CHF 4,900 vs CHF 4040 on Tuesday). The SNB news is the only big news out about Switzerland that I can find, yet this was announced early in the European day Wednesday – no reason I can see why it should cause CHF to collapse on Thursday. The explanation may be that nobody noticed the SNB news until they read the story in the Financial Times story on the subject yesterday (“Swiss National Bank: Alpcoin”), which pointed out that the central bank’s share price has mirrored that of Bitcoin. The FT concluded that “Under a benign scenario, the franc will fall this year, bringing a return to profits. ECB tightening should strengthen the euro while the SNB policy remains ultra loose. That is a reason to sell Swiss francs…”

Perhaps that is why CHF fell – maybe people have taken to trading it like Bitcoin. This graph shows Bitcoin in white and USD/CHF (inverted) in yellow – just a coincidence?

In any event, as someone whose wife & one daughter live in Switzerland and so is paying rent and living expenses there, I applaud the fall in CHF. With the lowest interest rates not just in the world but in recorded history, plus a preternaturally overvalued currency, CHF deserves to be a lot weaker, in my view. Unfortunately, purchasing power parity is usually based on prices for tradeables, not the overall domestic price level, and Switzerland’s current account surplus of 10.7% of GDP for 2018 (9.8% forecast for this year) suggests that the country’s currency is not yet overvalued enough to bring its external accounts into balance by any means.

(Bloomberg estimates CHF is overvalued 9.7% vs USD on a CPI basis but undervalued 5.4% on a PPI basis. But the Big Mac index, which more accurately reflects what the average tourist feels, rates it the most overvalued currency in the world at +21% vs USD.) Thus despite its low interest rates, the enormous current account surplus is likely to continue to prop up CHF, making any weakening of the currency slow at best.

Today’s market

The focus today is on two things: the monthly “short-term indicator day” in the UK, and the US consumer price index.

Britain’s short-term indicator day includes the trade figures, industrial & manufacturing production, and the new monthly GDP report. (There’s also a construction activity report, but that’s not significant for the FX market.) I think within these three, the focus is on trade and GDP.

Britain’s trade deficit is forecast to narrow slightly, with both the visible trade deficit and overall deficit expected to improve relative to their six-month moving averages. This should be positive for the pound, all things being equal.

As for the UK monthly GDP figure, the monthly growth rate is expected to come in at a relatively sluggish +0.1%, while the 3m/3m rate of change continues to come down. The composite PMI for Britain hit a post-Global Financial Crisis low in November, so this should come as no surprise. About the only thing boosting activity nowadays is furious stockpiling in anticipation of total chaos when Brexit finally takes place. Further slowing growth is likely to be negative for GBP.

It remains to be seen which of this morning’s indicators the market puts more weight on. Personally, I’d say the GDP is the most important, so pound might fall as slowing growth further diminishes the likelihood of Bank of England tightening this year (the market puts only a 55% probability on this happening).

Finally, we get what’s probably the big indicator of the week: the US consumer price index (CPI). The CPI isn’t the inflation gauge that the Fed actually targets –that’s the personal consumption expenditure (PCE) deflator, or more accurately, the core PEC deflator – but the market pays attention to it almost as if it were -- the correlation between the headline CPI and the movement of EUR/USD 30 minutes after is about 0.32, compared with 0.42 for core PCE deflator. Surprisingly, the market pays more attention to the headline CPI figure than to the core figure, whereas with the PCE deflator the attention is definitely on the core figure.

The market looks for a small mom fall in prices, which would lead to a modest slowdown in growth on a yoy basis as well. Much of this decline is due to energy prices however. Excluding energy, the core CPI is forecast to remain at +2.2% yoy growth. On balance, both figures are probably enough to satisfy the Fed’s recent comment that inflation remains “near 2%,” and therefore aren’t reason to suspend hiking rates. That should make the data dollar-positive.

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Marshall Gittler

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