The Swiss franc has replaced the USD as preferred store of refuge in the G10 as the US economic outlook clouds over and global equity benchmarks sink to the lowest levels for the year. Market Outlook
USD still on the back foot
The Swiss franc has replaced the USD as preferred store of refuge in the G10 as the US economic outlook clouds over and global equity benchmarks sink to the lowest levels for the year. With risk aversion stepped up and US short-term yields sinking to new historic lows, we look for the USD to stay under pressure over the coming week and the dollar index to close in on key support in the 83.19 area. The aggressive unwinding of short EUR and GBP positions is likely to slow ahead of the BoE and ECB meetings though no policy changes are anticipated. The ECB weekly refinancing operation is set to attract close scrutiny after the expiry of the one-year tender and the smooth transition to 3-month funding. We look to the RBA and Canadian jobs data for guidance on AUD and CAD, though feel defensive strategies are advised as the CRB and S&P eye pivotal support levels.
A broad-based retreat in global equities and an unrelenting run of weak US macro data boosted demand for the Swiss Franc and the JPY, propelling both currencies to the top of the weekly G10 rankings. USD/CHF has now extended its slump to 10 big figures since mid-June, sliding below 1.06. GBP enjoyed a mixed week, posting gains vs the high yielding and commodity currencies, but losing ground vs the Franc, EUR and SEK. The US employment report for June the June 17 SNB meeting, and progressed to below 1.35 vs the EUR. USD/CHF slipped below 1.10.
UK macro data brought news of slowing housing market activity and confirmation of a rebound in business investment in Q1 (+7.8% q/q). The latest credit conditions survey from the BoE presented a sobering picture for Q3, with credit availability of secured credit to households set to decline, but to increase slightly to corporates. The manufacturing and construction PMI were steady in June, holding at 57.5 and 58.4, respectively vs May. MPC members Miles and Posen made no judgement on whether further asset purchases will be necessary and reiterated that credit developments in the euro zone pose a challenge for the UK economy. The US unemployment rate fell to 9.5% in June from 9.7% in May.
UK rates extended their bullish run backed by flight-from-risk and weak US macro data. 10y yields hit a 3.30% low, supporting the bullish flattening influence in 2s/10s (255bp). 5y swaps fell to a 2.41% low but ended the week at 2.48%. Trendline resistance runs at 2.55%. The 3mth Libor/Ois spread held steady at 24bp in contrast to the widening in EUR (+6bp to 33bp). The ECB switched successfully from a one-year to a 3-month tender, attracting bids of ‘only’ 132bln eur. The special 6-day fine tuning operation attracted bid of 111.2bln eur, leaving the ECB with excess liquidity of 289bln eur. Gilt sales (IL 2047) and the syndicated 2040 deal attracted very solid demand.