Spectrum FX Weekly Report

Franc soars on Swiss National Bank hawkish surprise

Currency rankings last week were topped by an unusual winner, the Swiss franc.

The Swiss National Bank joined the chorus of hawkish central bankers and surprised markets with a 50 basis point rate hike when no move was expected, sending the franc screaming higher against every other currency. The sharp fall in risk assets worldwide had a mixed impact on currencies. The euro held its own against the dollar after an emergency ECB meeting calmed peripheral debt markets. Emerging market currencies had a mixed week, some up, some down, without a clear theme driving performance.

Now that key central bank meetings are behind us, markets will focus on leading and coincident macroeconomic data to see whether recession fears evident in equity markets are justified. Thursday is shaping up to be a key day in this respect, as the PMIs of business activity are released in the Eurozone, the UK and the US. These are particularly informative in the first two. We expect all the indices in all of the three economic zones to remain consistent with continued expansion, which may alleviate recession fears.

GBP

The Bank of England provided investors with yet another change in direction at its meeting last week. While the hike was largely expected, there were three hawkish dissenters, no dovish ones, and MPC communications turned hawkish, emphasising flexibility in responding to inflationary surprises, including 50 bp hikes if needed. Sterling reacted well to the news, and though it lost some steam on Friday, it ended the week up against the US dollar.

In addition to the key PMI release, we will see the inflation report for May released this week. A new record print could see markets price in more Bank of England hikes, and somewhat paradoxically serve to support the pound.

EUR

The ECB ad hoc emergency meeting, brought about by exploding spreads between peripheral sovereign debt and that of core countries, calmed the markets, in spite of the absence of details. While this was enough to put a temporary floor under the common currency, which actually managed to outperform most of its major peers, we expect that markets will demand details soon.

This week's scheduled ECB speakers could shed some much-needed light on the anti-fragmentation tool. Aside from that, Thursday’s advance PMIs should put to rest immediate contraction fears and could serve as a catalyst for a higher euro.

USD

The Federal Reserve reacted to the inflation surprise of the week prior with an outsized 75bp hike, the first one in three decades, and a strongly hawkish message. In its updated ‘dot plot’, Fed members indicated that they saw a much more aggressive pace of rate hikes in H2 2022 than anticipated back in March, with rates expected to end the year 175 basis points higher than current levels. While stock markets and risk assets in general reacted as one would expect (negatively), the dollar performance was more mixed and it failed to put in a really convincing rally.

The PMIs are generally less market moving in the US than elsewhere. Instead, there will be a lot of market focus on Fed chair Powell's semi-annual testimony to Congress, on Wednesday and Thursday, where we expect him to further clarify the extent to which the Federal Reserve is willing to constrain economic activity in order to bring inflation back down to target.

CHF

The Swiss National Bank certainly isn’t shy to surprise the market, which we were reminded of last week. Not only did the bank unexpectedly raise rates, but it hiked by 50 basis points. Moreover, it altered its tone on the franc significantly. The bank no longer sees the currency as ‘highly valued’, and signalled it may intervene on both sides of the market, including to prop up the currency should it weaken.

The inflation forecast was revised sharply higher, now assuming price growth will reach 3.2% in Q3 and remain relatively high (1.4-3.2%) throughout the forecast horizon. Importantly, the new forecast takes into account the recent rate adjustment. Elevated inflation may encourage further action, and the SNB suggested that further hikes ‘cannot be ruled out’. This is quite an explicit statement and, in our view, tees up another hike when the bank meets again in September, which would mark an exit to negative rates in Switzerland.

The bank’s decision, and its shift in rhetoric, warrants a change in our view of the franc. We’ll be revising our forecast for the currency in the coming days. The franc is now considerably stronger and we wouldn’t be surprised to see it testing parity with the euro in the near-term. With regard to upcoming news, a speech by SNB President Jordan will be worth watching on Wednesday.

AUD

Weaker risk sentiment, due to fears about a possible global growth slowdown, weighed on the Australian dollar at the beginning of last week, as did the fall in commodity prices.

Australia's strong May employment report did, however, help halt the decline in AUD. A net 60.6k jobs were added to the economy last month, well above the 25k pencilled in by economists. The unemployment rate also held at a record low 3.9% for the third consecutive month in May. The good state of the labour market reinforces expectations for another rate hike in July, in our view, likely by 50 basis points. The Reserve Bank of Australia’s meeting minutes, which will be published on Tuesday, could shed more light on the possibility.

Investors will also be paying close attention to the June preliminary PMIs, which will be published on Wednesday.

CAD

The Canadian dollar depreciated to its lowest level in nearly seven months against the US dollar, and underperformed almost all of its G10 peers last week. This was driven largely by the decline in global oil prices, which has seen Brent crude oil drop to a one-month low around $112 a barrel.

The May inflation report, which will be published on Wednesday, will be the main event for CAD this week. An upside surprise in inflation could encourage markets to increase their expectations about Bank of Canada rate hikes, which may drive CAD upwards. Markets are pricing in around a 50% chance of a 75 basis point hike at the next BoC meeting. An upside surprise in this week’s inflation print could cause markets to fully price in such a move, and raise expectations of similarly aggressive action at future meetings.

Aside from this week’s inflation data, April retail sales figures will be published on Tuesday.

CNY

The Chinese yuan sold off slightly against the US dollar last week, although the move reflected dollar strength. The yuan performed better than most currencies and the RMB CFETS index continued to march higher, reaching its highest level in six weeks. As expected, China kept the rate on its 1-year Medium-Term Lending Facility unchanged last week. It also maintained its loan prime rates earlier today. A fragile economic backdrop and an uncertain covid situation on the one hand, and aggressive interest rate hikes in the main economies on the other, make for an environment where waiting is a wise thing to do.

That said, internal news has largely been positive in recent days. Key economic prints for May released last week were better-than-expected and new virus cases have declined notably, with a number of local flare ups now appearing contained. The economic calendar for China is largely empty this week and we’ll continue to focus on news on the covid front.

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