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Markets Question SNB’s Credibility By Keeping CHF Strong

Market movers today

Both Norway and Sweden are set to release PMI data. Concerning Swedish PMIs, we have seen a decline in both the manufacturing and services indices over the past three months. They are now close to the lowest levels seen in the euro crisis. We do not expect any large movement, but, rather, for it to stabilise at a similar level. We expect the Norwegian PMI to have fallen moderately to 53.0 in December.

Today marks the end of the holidays. Market commentary has centred on weak liquidity conditions to explain everything from EUR and GBP strength to equity market movements. Thus, the scene will be set for 2020 by assessing how markets fare in the coming days and judging what is liquidity-driven and what is macro-driven.

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Selected market news

European bond yields rose significant on the last trading day of 2019 and equity markets ended on new highs. However, while bond yields have risen almost 50bp since August, equities have continued to rally. The rise in yields and in bond and swap yields is supportive for the ‘strained’ European life insurance and pension fund sector. One big question is whether we will see some reallocation from equities into fixed income in the coming months on the back of the strong equity markets and cheaper bonds.

Year-end in the USD money market, both for EUR/USD FX forwards and the USD repo market, turned out to be a relatively calm affair helped by the supply of more than USD400bn in liquidity by the Fed through repos and T-bill purchases. In our view, market pricing in Q1 is reflecting a continued expectation of Fed liquidity support.

The Chinese central bank, the People’s Bank of China, has cut the cash reserve ratio for commercial lenders by 50bp. The move should further increase availability of credit and support the ongoing recovery, thus signalling monetary support will continue as we move into 2020.

CHF support extended further after USD/CHF went through its 2019 low. It is remarkable to us how CHF has seen broad-based support since the central bank (SNB) met in December, strengthening despite fading political risks. One interpretation is thus that the CHF is strengthening as markets have begun expecting a prolonged period of low inflation (CHF positive) without adding to expectations that SNB could offset this via further rate cuts (potentially CHF negative).

EUR/GBP ended the year around 0.845 and today’s final release of PMI manufacturing for December should not be a big market mover for the GBP. With likely limited political news ahead of the UK’s departure from the EU on 31 January to drive the GBP, focus will likely shift to the Bank of England and whether or not it will cut at its meeting later this month. In that sense, the upcoming data releases, not least the monthly GDP estimate for November due out on Friday next week, are key to follow. As we expect the Bank of England to cut, given we expect data to come out weaker than the Bank of England does, we could see a move higher in EUR/GBP this month.