You might think that the economic news might be slowing down this week after the week we have just had. Alas, that is not so; this week's forex market might be just as choppy with some critically important reports emanating from Japan, China, Europe, and the UK, in particular.
Due on Wednesday, US Retail Sales growth for October is anticipated to increase by 0.7%, the same as September's Retail Sales growth. However, with supply constraints potentially inspiring people to complete some Xmas shopping early, a surprise beat might be on the cards for this report.
Back over the Atlantic, the UK releases its CPI data for October. The YoY CPI for the UK currently stands at 3.1%, after edging down from 3.2% in September. Septembers CPI dip might be temporary, and several factors indicate that CPI could rise with Octobers data. Chief among them is the flow-on effect expected from the UK factory gate prices rise to 6.7% in September, from 6.0% in August.
On Thursday, it is Canada's turn to release CPI data. After Septembers data, Canada's inflation rate was running at an 18-year high of 4.4%. Market consensus is pointing toward a fifth straight increase in the CPI, to 4.6%, while TradingEconomics predicts an even more significant leap to 4.9%.
We end the week with Japan noting its CPI data for October. Sustainable price growth in Japanese consumer prices is in doubt moving forward. Last month, CPI hit 0.2%, after remaining below 0.0% since the latter half of 2020. However, Japanese businesses are largely absorbing the rise in their input costs, whether temporary or permanent, rather than passing them onto consumers.
The Central Bank of Switzerland, the Swiss National Bank (SNB), is running very high on foreign reserve currency.
Beginning in 2020, the SNB has been increasing the rate at which it sells Swiss Francs (CHF) and subsequently buys foreign currency. Further, the SNB has recently passed a critical threshold for the first time: CHF 1 trillion of foreign currency reserves.
Since January 2020, SNB’s foreign currency reserves have increased by approximately 170 billion USD. In the time immediately preceding January 2020, it had taken the SNB four years to add this many foreign currency reserves to its books. Although, during this time, you could argue that the SNB was still pursuing a rather aggressive foreign currency purchase program.
The printers of a similar safe-haven currency, the Bank of Japan (BOJ) and its Japanese Yen (JPY) afford a suitable comparison for the SNB and its CHF. Since January 2020, the foreign currency reserves of the BOJ has increased US$50 billion, one-third that of the SNB. Moreover, BOJ foreign currency reserve growth has practically flat-lined/ trended downwards since it peaked in July 2020.
The SNB purchases foreign currency to suppress the value of the CHF and make its exports more competitive on price.
Unfortunately, the demand for CHF is currently in overdrive, as is natural during a global economic upheaval. Seemingly, the CHFs safe-haven status is working against the impulse of SNB to help the country’s exports remain competitive.
Now, what the SNB is doing is not all that uncommon. Effectively, all Central Banks around the world do this to some degree. The SNB is different because analysts are concerned that the NBS’s selling of CHF is unsustainable. At the current rate, something might have to give soon enough.
The SNB cannot keep trading CHF for foreign currency and suppressing the CHF’s fair value indefinitely. Once the SNB hit a threshold, the CHF could come to appreciate significantly beyond its current value. The SNB has simply been manipulating the CHF for too long. The risk for a significant correction for the CHF has been steadily increasing alongside the manipulation. For this reason, brokerages, such as BlackBull Markets have increased the margins required to trade CHF pairs.
Traders of CHF will remember in 2015, when the EUR flash-crashed by 20% against the CHF after the SNB scrapped its unofficial peg to the Euro.
It may seem that the only way for the CHF is up, but this is not so. A genuine risk exists for both long and short traders of the CHF.
Traders risk sentiment may change, and interest in the CHF might shift, and a devaluation might occur. A catalyst for this scenario might be sudden rising asset yields outside of Switzerland. Such a scenario would propel the SNB to offload some of its foreign assets for CHF. The CHF might keep stable if the SNB is fast enough, but a flash crash is always possible.
The United States blacklist has gained eight new Chinese technology companies, added to the list on Monday under the Trump administration. The White House accused these eight tech companies of being implicated in human rights violations against Muslim minorities in China’s far-western province of Xinjiang.
Two of the companies included on the list are Hangzhou Hikvision Digital Technology Co. and Zhejiang Dahua Technology Co. both companies specialize in video surveillance, that control nearly a third of the global market for video surveillance, with their cameras all over the world.
With China’s Vice Premier Liu He scheduled to arrive in Washington for high-stakes trade talks being viewed by financial markets around the world, the timing for these blacklisted companies seem less than ideal.
President Donald Trump has stated “there’s a chance that we could do something very substantial” regarding the scheduled meeting. Furthermore, warning China that if the Nation does anything “bad” to quell protests in Hong Kong, trade negotiations with the United States would suffer.
As a result, Wall Street closed in the red, as optimism of an abrupt trade war resolution faded. On Tuesday, a Chinese newspaper reported that China has toned down it’s expectations ahead of the new negotiations meeting scheduled to start Thursday in Washington. Stating that Vice Premier Liu He will not carry a “special envoy” title, signalling low commitment.
Investors are also awaiting possible Chinese retaliation following the additions to the blacklist on Monday. From a macro perspective, U.S. producer pricing saw the largest decline in eight months this September. Creating more room for monetary easing.
As a result, trade tensions and on going weak global demand took its toll on U.S. stock process.