Euro and Swiss franc under pressure

Positive momentum in risk assets slowed, with higher core bond yields in the US and Europe weighing on sentiment. The USD in particular has been buoyed by higher US bond yields, with the move in line with my long held medium term view of a firmer yield led gain in the USD. Commodity prices in contrast have come under growing pressure, with gold and copper prices sliding in particular. Risk measures continue to improve including my risk barometer, suggesting that the overall tone to risk assets will remain positive.

The main focus today will be on a plethora of US data releases including industrial production, Philly Fed and Empire manufacturing confidence while in Europe attention will be on Spanish and French bond auctions. US data will likely remain upbeat, while the auctions should be well received.

EUR has pulled back sharply over recent not just against the USD but also on the crosses, with EUR/GBP finally playing some catch up yesterday. It’s interesting that the drop in the EUR has occurred despite generally improving conditions for peripheral Eurozone as reflected in narrowing yield spreads between peripheral countries and Germany.

The bottom line is that the EUR is suffering from a widening in the US / Europe (Germany) bond yield differential as it is becoming increasingly clear that the US economy will strongly outperform the Eurozone economy this year. As noted at the beginning of the week EUR/USD was set to drop to below support around 1.3055. Having hit this level, strong support around the 1.2974 level moves into sight.

Ahead of today’s quarterly Swiss National Bank meeting at which no change in policy is widely expected, EUR/CHF has taken a sharp lurch higher, finally moving away from around the 1.2050 level it has been trading at over recent weeks. While I am bearish on the CHF over the medium term further upside in EUR/CHF will be limited over the short term given that the move in the currency is at odds with interest rate differentials which have actually narrowed between the Eurozone and Switzerland. Technical resistance around 1.2298 will cap gains over coming sessions.

As for USD/CHF the picture remains a bullish one, with general USD strength driven by higher yields, pushing the currency pair higher. I look for a test of resistance around 0.9393 over coming sessions.

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2 Responses to “Euro and Swiss franc under pressure”

  1. Dean Says:

    Hi Mitul, I have recently found your blog and am thoroughly enjoying reading your views. I wonder if you have any opinion on the recent weakness of JPY versus USD. The move seems to have been quite sudden and without any significant policy announcements or economic data.

    • Mitul Kotecha Says:

      Hi Dean, thanks, I’m glad you are enjoying the blog. In my view the move in USD/JPY has been largely associated with a rapid widening in the US yield advantage versus Japan. The 2-year yield differential has now reached 24 basis points largely due to higher US bond yields. The recent actions by the Bank of Japan has helped to keep JGB yields low, thus allowing a widening in the US yield advantage. My correlation spreadsheets show that USD/JPY is highly sensitive to yield differentials. Looking ahead, I think USD/JPY will continue to move higher over coming months as the yield gap widens further but in the near term I think the upmove in USD/JPY may see a downward correction as it appears to have gone too far, too quickly.


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