Macro and Vol Commentary
The euro has been heavily sold, but with the ECB raised rates by 75bp last week, will that change its fortunes?
- GDP continues to moderate at 2.8% Y/Y in Q2, down from 4.4% in Q1.
- The M/M figure was 0.3% Q/Q in Q2; this is expected to moderate further in the next couple of months and into 2023.
- Retail sales continue to grow at 2.6% Y/Y, higher than the previous month at 1.2% Y/Y. Retail sales have remained resilient despite the slowing economy and rising prices, and consumer behaviour is expected to change in the coming months due to energy costs.
- CPI data is significantly below other member states at 3.5% Y/Y in August, and price growth accelerated in August to 0.3%, up from 0%. Energy and power costs are rising, prompting prices to remain high.
- Businesses need to prevent pricing behaviours from becoming entrenched in the economy and their business models, as this would have a lasting inflationary impact on the economy.
- Businesses have not had to deal with sharply rising prices, the business previously was reluctant to raise prices, but now that strategy has been changed. The inflationary outlook and a less integrated global economy will put pricing power back in the companies’ hands.
- Producer and import prices have risen 6.3% for July, this will remain the case, but shipping costs are starting to fall. The M/M data suggests weakening import prices, trend producers hope will continue.
- Unemployment has remained low in recent months and stood at 2.2% in August, with non-seasonally adjusted data showing 2%.
- Switzerland's inflationary environment is more muted, and this could protect employment data. In Europe, we expect unemployment to rise as the cost of living causes some industries to scale back on output or adjust the times not to consume energy in peak hours.
- The squeeze in business margins and a reduction in aggregate demand could see unemployment rise, even with governments stepping to cut energy bills.
- Higher interest rates and costs could also reduce investment in the near term, reducing employment prospects for the next 12-18months. However, we do not expect this recession to a long-lasting.
- Industrial output moderates as pricing pressures continue to impact sentiment; while still in growth at 5.1% Y/Y in Q2, we expect a slower pace of change in the coming months.
- Construction output continues to grow, and after a revised level of 6.5% in Q1, growth was 4.1% in Q2.
- Manufacturing PMIs reached 56.4 in August, down from 58 the prior month. This was the slowest factory activity growth since November 2020. A mild increase in the backlog of work indicates a robust Swiss economy.
- As mentioned above, higher costs are causing purchasing prices to rise while employment growth stalled.
- Domestic sight deposits have started to decline at CHF640.8bn, with total sight deposits at CHF752.8bn, which remains steady and near record highs.
- We could see a reduction in domestic sight deposits in the coming weeks.
- The SNB continues to highlight that its primary contribution is price stability. As a result, it is expected that the SNB will raise rates by 50bps. This would bring the bank rate to -0.25%.
- The SNB 7-day dollar repo rate is at 2.58% as of September 7th.
- The Swiss 10yr yield stands at 0.835%, and we expect this to continue higher in the near term as the SNB raise rates. Slower growth could cut the yield peak, but we expect yields to rally further soon.
Both banks are set to raise rates in their next meeting, and the ECB raised rates by 75bps, bringing rates into positive territory, they are expected to raise rates by 75 in their next meeting. WIRP data suggests that rates will reach 2.105% on June 15th, and the implied rate at the end of December is 1.165%, with the probability of a rate hike over 100% out to February 2023. Superseding this date, the probability is below 50%, and we could see rates cut next year in an attempt to stimulate the economy if the bloc passes through the cost-of-living crisis effectively in the coming months and energy costs start to subside in 2023. The European economy is entering a recession, and while we do not expect it to be long-lasting, compared to the Swiss economy, it will be longer. The Swiss economic fundamentals remain preferential compared to the bloc, and while the euro has rallied against CHF in recent sessions, we expect CHF to strengthen following the ECB. A higher-than-expected rate hike of 75bp for the SNB. We expect EURCHF to continue to weaken in the coming weeks, and the risk-reward is against traders considering the move in the last 12 months, but for any rally above 0.92, we favour selling.
(Sources: Federal Statistics Office of Switzerland, State Secretariat for Economic Affairs)
The energy crisis and geopolitical tensions have recently exacerbated the EUR sell-off and driven the safe-haven CHF bid. To this extent, European public sector are planning to intervene to help the private sector to absorb losses from such inflationary pressures, which might translate in more EUR downside and possibly further currency weakness. On the other hand, ECB hawkishness and determination to tame inflation is shifting rates expectations higher, which might play up favourably for the EUR. Additionally, 1-month volatility has been realising lower than implied since the summer, and we expect this trend to continue. All in all, we expect EURCHF to trade range-bound between 0.96 and 0.98 in the short-term, and thus favour buying a Butterfly Spread.
EURCHF 1-month Implied vs Realised Volatility
EURCHF Trade Idea
Buy EURCHF Put 0.9500 Strike in EUR 5mio – Pay EUR 20K Circa
Sell EURCHF Put 0.9750 Strike in EUR 5mio – Rec EUR 68K Circa
Sell EURCHF Call 0.9750 Strike in EUR 5mio – Rec EUR 34K Circa
Buy EURCHF Call 1.0000 Strike in EUR 5mio – Pay EUR 6K Circa
Total structure net receive EUR 76K circa.
USDBRL NDO Positioning Data 24/08/2022 - 31/08/2022
Volumes for USDBRL have declined in the week to September 9th, put volumes exceed calls but the range compared to the previous week is a lot more narrow. There is little upside cover in the market, and if spot rallies this could trigger some covering and vol to be bid. The notional value of calls traded are less than put options, puts traded push below 5 towards 4.80. The market suggests continued consolidation, but with central bank meetings, we expect the USD to firm and this could cause prices to cover.
USDBRL NDO Positioning Data 31/08/2022 - 07/09/2022
USDCNY Vanilla Positioning Data 23/08/2022 - 31/08/2022
The charts below suggest there is little pattern in USDCNY despite spot rallying. The volumes for call options are higher than puts, but there are very few calls set to expire in the near term. Put options due to expire trade a range of 6.80 to 7 where as the calls in trade to 7.10 but after October the market trades a much wider range up to 7.20.
USDCNY Vanilla Positioning Data 31/08/2022 - 07/09/2022
EURCHF Vanilla Positioning Data 07/07/2022 - 07/08/2022
The spot market has weakened in the last 12 months, and the options market continues to show a weaker currency with put options trading down down to 0.9 but there is little cover below this level. Spot has rallied marginally but there is little cover above 0.98 in Chart 2. Notional values are higher for puts and we expect the spot to continue to fall with traders looking to get more downside cover despite the ECB rate rise.
EURCHF Vanilla Positioning Data 07/08/2022 - 07/09/2022
Charts and Tables
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
Key Events & Releases
JP Morgan Global FX Volatility
The index has improved so far in September but struggled above the resistance at 11.65 and now stands at 11.15. The stochastics are falling but are highly oversold, but the MACD diff is negative but is showing signs of convergence, suggesting we could see the index push lower in the near term before the change of trend. The index needs to hold above 50 and 100 MA at 11.22 and 11.14, respectively, before targeting 11.65 once again. The reaffirmation of near-term support at the moving averages suggests we could see the market push higher. On the downside, rejection above 11.40 could trigger a break of support at the 200 moving average at 10.85 before 10.57. The indicators point to the index being oversold, and if it holds above the 50 MA, we could see further upside in the near term.
The dollar index has been gaining in recent weeks, but resistance at 110 prompted the index to sell off down to 108.25. Prices broke below the support level of 50 and 100 MAs at 109.47 and 109.01, respectively, and today’s losses are well bid. The stochastics are confirming the downside momentum, with %K/%D falling in the oversold. The MACD diff is negative and diverging marginally, suggesting we could see prices edge back to the 108 level, where the index might find near-term support. If this support is breached, we could see significant downside momentum to 200 MA at 107.57. On the upside, if resistance around 100 moving average does not hold firm, this could trigger gains back to 50 MA and 110, a robust resistance. The most recent selloff and indicators suggest we could see the index weaken further in the near term.
The pair has been range-bound in recent weeks, trading in the 0.9604-0.9867 range. More recently, the market has pierced the moving averages at the 100 and 200 MAs at 0.969 and 0.9705, respectively, but resistance at 50 MA at 0.9744 held firm, and the pair remained at 0.96881. The stochastics are rising, but %K is seen tailing off on the downside, a potential sign of a trend reversal in the near term. MACD diff, however, recently converged on the upside and now growing. The indicators are painting a mixed picture, and to suggest further upside, the pair needs to break above the 50 MA completely before attempting to test the 0.9784 level. On the downside, if the resistance levels at moving averages hold, we could see a fall back to 0.9633 before 0.9604. There is appetite on the upside, however, the pair has been struggling to break above all of the moving averages.