SNB Surprises the Market (Again)

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Marc Chandler
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Seeking Alpha

Overview: The US dollar is trading higher against all the G10 currencies today but the Norwegian krone. Norway’s central bank left policy on hold and warned that if the economy performs as expected, it does not anticipate a rate cut until next year. On the other hand, the Swiss National Bank surprised many with its second consecutive rate cut. The Swiss franc is the weakest of the major currencies, off about 0.70% against the dollar. The Bank of England is up next. It will not cut rates, but a close vote could weaken sterling, which is trading slightly heavier. Emerging market currencies are mostly weaker. The PBOC set the dollar’s reference rate at the strongest level since last November and the offshore yuan has fallen to new lows for the year. The Mexican peso is one of the exceptions among emerging market currencies today and is slightly better than steady.

Equities are mixed today. In the Asia Pacific session, Japan, Hong Kong, and Chinese markets fell, but most of the other large bourses were higher. Europe’s Stoxx 600 is recouping yesterday’s nearly 0.2% loss in full and is advancing for the third session this week. US index futures point to a higher opening led by the NASDAQ. Benchmark 10-year rates are firm today. European yields are up most 2-3 bp and core-peripheral spreads are slightly narrower. The US 10-year yield is up about 2.5 bp to 4.25%. Gold is trading with a firmer basis, but after reaching a nine-day high near $2345 has pulled back and found support near $2332.August WTI busted through the $80 level yesterday that has capped it since the end of April. Its gains were extended to about $81.15 before the buying dried up and it slipped back to around $80.50.

Asia Pacific

Yesterday, Japan reported a smaller trade deficit (~JPY1.22 trillion) helped by the strongest year-over-year rise in exports since November 2022 (13.5%). The May imbalance is almost always worse than April’s, so the deterioration was not so surprising. Moreover, the average monthly shortfall this year is about JPY690 bln compared with an average of JPY1.4 trillion in the first five months of 2023 (and JPY1.35 trillion in Jan-May 2022). Earlier today, Japan’s weekly portfolio flow report showed that Japanese investors continued to liquidate foreign bond holdings. Chinese banks left their loan prime rates steady (3.45% for the one-year and 3.95% for the five-year). Tomorrow, Japan, and Australia see flash June PMI readings.

The dollar was confined to about a third of a yen below JPY158 yesterday. Since the US employment data on June 7, with one exception (June 12), the dollar has settled above JPY157. It set a post-intervention high near JPY158.25 last Friday and tested it again on Tuesday this week. It reached nearly JPY158.50 today. The rolling 30-day correlation of changes in the exchange rate and changes in US 10-year yields is holding near 0.60, a three-month high. The hawkish hold by the Reserve Bank of Australia earlier this week have given the Australian dollar a lift. It has been fraying support near $0.6600 earlier and reached $0.6675 yesterday, a five-day high. The gains were extended marginally today but held below $0.6680. Last week’s highs were near $0.6705, but it has not closed above $0.6700 since mid-January. The PBOC set the dollar’s reference rate at CNY7.1192 (CNY7.1159 yesterday). This is the highest since last November. Against the offshore yuan, the dollar traded settled above CNH7.28 for the first time in three months and rose to a new high for the year today of almost CNH7.2880.

Europe

Two European G10 central banks have already met, and the Bank of England’s decision will be announced shortly. As widely expected, Norway’s Norges Bank left policy on hold at 4.50%. Officials are in no hurry to adjust policy, and the swaps market sees around a 20% chance of a cut this year, putting the Norges Bank on the hawkish side of the G10 spectrum. It suggested that barring a surprise, it did not anticipate easing policy until next year. Arguably, the Reserve Bank of Australia, which implicitly threatens to hike rates, is the only G10 central bank more hawkish. The Swiss National Bank caught the market off-guard for the second time. It surprised many with a rate cut in March and followed up with a rate cut earlier today. The Swiss policy rate stands at 1.25%. The central bank meets quarterly, and market is pricing in around a 65% chance that the ECB cuts in September. Moreover, the political uncertainty in the eurozone, has helped drive the franc to four-month highs against the euro. The UK reported May CPI yesterday. The year-over-year pace fell to 2.0% from 2.3% in April, as expected. Service inflation and the core measure remain elevated and the base effect warns this may be the low point for the headline rate. After the data, the odds of rate cuts were shaved. There is little doubt that the Bank of England is on hold today. The swaps market has about a 36% chance of a cut at the next meeting on August 1 (down from ~52% on Tuesday) and around a 77% chance of a cut in September (~88% chance on Tuesday). Still, the market is pricing in a 76% chance that there will be two cuts this year (~85% chance Tuesday). Tomorrow, the UK will likely report a recovery in retail sales in May (~1.6%) after a 2.3% drop in April. Both the eurozone and UK see flash June PMI reports tomorrow.

The euro traded in a little more than a quarter-cent range yesterday above $1.0725. It has held below $1.0750 today and found support slightly below $1.0715. The euro appears hemmed into the $1.07-handle today. There are a little more than 1 bln euros in options expiring today at $1.08 and another set for almost 2 bln euros at $1.07 that are also expiring. After falling slightly through $1.0670 at the end of last week, the euro has been recorded higher lower each session this week and the daily momentum indicators are poised to turn. Immediate potential may extend toward $1.0785-90, which hosts the (50%) retracement of the losses since the US jobs report and the 200-day moving average. The Swiss franc is the weakest currency among the G10 today, off about 0.70% against the dollar and about 0.40% against the euro. Sterling bottomed last Friday near $1.2655, its lowest level in almost a month. It has been recording higher lows and highs this week and reached $1.2740 yesterday (where options for almost GBP1.5 bln expire Friday). It is straddling $1.2700 in the European morning. The euro nicked support at GBP0.8400 at the end of last week and recovered to around GBP0.8465. The pullback yesterday, held support near GBP0.8430. We suspect the euro’s upside correction has not been completed.

America

May US retail sales were weaker than expected and the April series were revised lower. The headline rose by 0.1% compared with the median forecast in Bloomberg’s survey for a 0.3% increase and April was revised to -0.2% from a flat initial reading. Retail sales are a subset of personal consumption and the miss on retail sales warns of downside risk to May’s PCE. The only service-sector category including in retail sales, spending at bars and restaurants fell by 0.4%, the most since January. On the other hand, May industrial output surged by 0.9% (0.3% expected). The Atlanta Fed’s GDP tracker was remained at 3.1% (from June 7), as the weaker consumption was offset by a tick up in private domestic investment and government spending. Today, the US reports May housing starts and permits, which could also impact GDP estimates. Economists in Bloomberg’s survey project a small increase after the 5.7% surge in April. The current account deficit for Q1 may attract some notice as it is likely to move back above $200, but it tends not to drive the markets in at least the short-to-intermediate terms. Among the various Fed regional surveys, the market seems to give the Philadelphia Fed survey the most weight. The June survey due today is expected to be little changed from May’s 4.5. It was in negative territory for most of last year and it carried over to January, but it has been positive for the past four months. However, given last week’s 13k jump in weekly initial jobs claims (to 242k the most since last August), today’s report takes on heightened importance especially as it also covers the nonfarm payroll survey period. The median forecast in Bloomberg’s survey sees claims unwinding half of the previous week’s increase, which would still leave it near 10-month highs. The market seems to react more to weaker rather than strong data. Mexico reports April retail sales data today, and Canada tomorrow. Mexico’s retail sales are expected to have begun Q2 on a soft note after falling by an average of 0.1% in Q1 24 after an average decline of 0.3% a month in H2 23. Canada’s retail sales are expected to have risen for the first time this year.

The US dollar slipped to five-day lows slightly below CAD1.37 yesterday. It also was where the 20-day moving average was found, and the dollar has not settled below it since June 2, and the halfway mark of this month’s gain. It is holding above CAD1.37 today. The greenback recorded lower highs and lower lows in the first three sessions of the week. Last week’s low was closer to CAD1.3680. A break of CAD1.3660 could spur a test on more formidable support around CAD1.3600. The dollar has spent the last two sessions mostly below MXN18.50. Recall it peaked last Wednesday (June 12) ever slightly below MXN19.00. We suspect that the stale long peso positions have been pared but not fully, while the stalling of the dollar’s upside forces short-term momentum traders and trend-followers to cover short peso positions given the expensive carry. Support is seen in the MXN18.20-30 area.