DB Risk/Reward Favours Long NOK/CHF Positions Today

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FX Daily: Risk/Reward Favours Long NOK/CHF Positions Today

Risk/Reward Favours Long NOK/CHF Positions Today

Though monetary policy considerations have been overshadowed by recent financial market turbulence, today sees important interest rate announcements from the Norges Bank and SNB. Markets are widely expecting a 25bps hike from both central banks, so attention is likely to focus on the accompanying monetary policy statements. In Norway, official commentary and an acceleration of the pace of rate hikes over the last quarter has resulted in the market pricing official rates to 5.0% by year-end. Compared to December, today's inflation report is therefore likely to incorporate large upward revisions to the bank's interest rate projections, and be accompanied by an escalation in the report's hawkish language. Looking at the risks for the NOK, we estimate that the market is front-loading the next three meetings with an additional 43bps of tightening which may lie on the aggressive side. However, an overall hawkish report combined with the recent paring back in long NOK positions (see chart at left) may mean that today's risks are more tilted towards NOK strength rather than a further squeeze higher. In contrast, we believe the risks to today's SNB are skewed towards a more dovish outcome. EUR/CHF rallied above 1.60 in the days following last quarter's monetary policy report, which despite previous weeks' hawkish official commentary was accompanied by a significant downward revision to the bank's inflation projections. More recent GDP and inflation data has been on the low side of expectations, which may make the SNB less inclined to ring hawkish inflation bells in today's monetary policy meeting.

A Turn in US Capital Flows?

Last month's TIC release saw the largest monthly drop in net US foreign securities purchases on record, with the US drawing a net capital inflow of $63bn over December compared to November's $122bn. In the detail of the release, the largest fall was registered in foreign buying of US corporate bonds, though there were broad-based declines in purchases of other securities as well. Looking ahead to today's release, we would be cautious in looking for sustained weakness in US capital flows, as last month's fall in corporate bond purchases was in line with the drop-off in issuance usually observed towards the end of the year (see chart at right), and may have involved some payback from the larger inflows registered the month before. That said, today's release may attract increased attention given the recent slump in US equity markets, with a weak number likely to see investors questioning whether we are in the midst of a more significant turn in US capital inflows.