Swiss Franc Surges as Dollar Weakens and Swiss National Bank Holds Steady

Forex

Summary:

The Swiss Franc has surged to its highest level against the US Dollar since July, propelled by the persistently weak dollar and support from the Swiss National Bank (SNB). Negative sentiments expressed by Federal Reserve members have raised expectations of potential interest rate cuts in the US, intensifying pressure on the dollar. Simultaneously, the SNB's strategic selling of foreign currency reserves and commitment to a stable monetary policy have contributed to the Franc's strength, despite a noticeable slowdown in Switzerland's inflation rate.

The Swiss Franc has recently exhibited remarkable strength against the US Dollar, reaching a peak above 0.87—the highest level since the conclusion of July. This surge can be attributed to the sustained weakness of the dollar, coupled with unwavering support from the Swiss National Bank (SNB). The recent expressions of negative expectations by Federal Reserve members in their latest meeting have heightened market anticipation of potential interest rate cuts in the coming year, intensifying the pressure on the dollar. Swiss Franc Surges as Dollar Weakens and Swiss National Bank Holds Steady_1

Swiss Franc Surges as Dollar Weakens and Swiss National Bank Holds Steady_1

USDCHF chart

The Swiss National Bank has played a pivotal role in bolstering the Franc's strength. In its effort to counterbalance the impact of commodity price fluctuations and curb import-driven inflation, the SNB has consistently sold foreign currency reserves. This strategic move serves as a crucial tool in the central bank's arsenal against elevated inflation in Europe, contributing to the resilience of the Swiss Franc.

Recent data reveals that the foreign exchange reserves held by the Swiss National Bank experienced a sixth consecutive monthly decline, reaching the lowest level in seven years in November. This deliberate reduction in reserves underscores the SNB's commitment to its monetary policy objectives, emphasizing the importance of maintaining a robust Swiss Franc.

In terms of monetary policy, the central bank opted to keep its key interest rate unchanged in the latest announcement. The decision was accompanied by a recognition that inflation risks persist despite a noticeable slowdown in the country's inflation rate. This cautious approach signals the SNB's commitment to monitoring economic conditions closely and making informed decisions to safeguard the stability of the Swiss economy.

As the Swiss Franc continues its ascent, driven by both global and domestic factors, market participants are closely watching the dynamics between the US Dollar and the Swiss National Bank's interventions. The delicate balance maintained by the SNB in navigating economic challenges reaffirms its role as a key player in shaping Switzerland's monetary landscape. Investors and analysts will undoubtedly keep a keen eye on future developments, particularly as central banks worldwide respond to evolving economic conditions.

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Warren Takunda

Economic

The United Kingdom has taken a disconcerting turn, with recent data painting a bleak picture of the nation's fiscal health. In the third quarter of 2023, the UK's gross domestic product (GDP) contracted by 0.1%, a deviation from the initially anticipated flat reading. This contraction, alongside revised Q2 figures indicating no growth instead of a 0.2% expansion, has set alarm bells ringing, pushing the nation to the brink of a potential recession.

Close to the Brink: UK Economy Nears Recession with a 0.2% Contraction in Q3_1

Sectoral Struggles:

A closer inspection of the data reveals a multifaceted decline, with the services sector being a primary contributor to the economic downturn. The services sector, encompassing a wide array of industries, experienced a 0.2% contraction, surpassing the initial estimate of a 0.1% drop. Notably, the information and communications subsector, including telecommunications and computer programming, suffered a substantial 1.4% decline. This downturn underscores the challenges faced by technology-intensive industries amid global economic uncertainties.

In contrast, there were modest positive revisions in both the production and construction sectors. Production, initially reported as showing no growth, saw a slight uptick of 0.1%, while construction experienced a more significant revision, rising to 0.4% from the initial estimate of 0.1%. These upward adjustments offer a glimmer of hope amid the prevailing economic gloom.

Expenditure Dynamics:

Turning to the expenditure side, household spending, a crucial driver of economic activity, contracted more than expected by 0.5%, compared to the initial estimate of -0.4%. The decline was particularly pronounced in social protection, as well as in expenditures related to jewellery, clocks and watches, restaurants, and hotels. This suggests a possible shift in consumer behavior influenced by broader economic uncertainties.

Business investment, a key indicator of corporate confidence, also recorded a contraction, albeit less severe than initially estimated. The revised figures show a 3.2% decline, an improvement from the earlier projection of -4.2%. The decline was primarily driven by reductions in investments related to transport equipment. On the brighter side, government consumption saw a positive revision, rising to 0.8% from the initial estimate of -0.5%, potentially offering a stabilizing force in the midst of economic headwinds.

Close to the Brink: UK Economy Nears Recession with a 0.2% Contraction in Q3_4

Trade Woes:

The international trade scenario adds another layer of complexity to the UK's economic challenges. Both exports and imports were revised lower, with exports contracting by 0.6% (compared to the initial estimate of -0.5%) and imports declining by 1% (compared to the initial estimate of -0.8%). These downward revisions underscore the impact of global economic uncertainties and trade disruptions on the UK's external trade dynamics.

Close to the Brink: UK Economy Nears Recession with a 0.2% Contraction in Q3_5

The latest economic data paints a somber picture of the United Kingdom's economic health, signaling a potential descent into recessionary territory. The sectoral variations and expenditure dynamics reveal a complex web of challenges, with some sectors facing pronounced contractions while others show signs of resilience. As policymakers and businesses navigate this economic turbulence, the road to recovery will likely hinge on strategic interventions, both domestically and in response to global economic trends. The intricate dance between fiscal policies, business sentiments, and consumer behavior will ultimately shape the trajectory of the UK's economic recovery in the coming quarters.

To stay updated on all economic events of today, please check out our Economic calendar

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Chandan Gupta

Commodity

Political

Oil Sees Weekly Gains Amid Red Sea Disruption Concerns and Angola's OPEC Exit_1

Oil prices went up on Friday and are set for a second week of gains. This is because people are worried that the supply in the Red Sea might be interrupted. Analysts think that Angola leaving OPEC won't have a big impact on the market.

Brent, a major measure for a lot of the world's oil, went up by 0.69% to $79.94 per barrel at 9:55 am UAE time. West Texas Intermediate (WTI), which keeps track of US crude, increased by 0.72% to $74.42 per barrel. On Thursday, Brent initially dropped by 2.4% before recovering some losses, settling 0.39% lower at $79.39 per barrel. WTI closed down 0.44% at $73.89 per barrel.

Africa's second-biggest oil producer, Angola, said on Thursday that it's leaving the oil producer’s group due to a disagreement over production quotas. Angola's Minister of Mineral Resources, Petroleum and Gas, Diamantino Azevedo, stated, “At the moment, Angola doesn't gain anything by staying in the organization, and in defense of its interests, it has decided to leave.”

Angola, part of OPEC since 2007, produces about 1.1 million barrels of oil per day, compared to OPEC's 28 million bpd. Angola's exit reduces OPEC's membership to 12 countries, with crude oil production dropping to around 27 million bpd, about 27% of the global oil market.

Analysts suggest that Angola's departure may lead to more flexibility among remaining OPEC members regarding their production levels. However, it could also raise speculation about the possibility of other countries leaving the group.

Edward Bell, head of market economics at Emirates NBD, says Angola's decision will likely have a "limited" impact on oil markets. He emphasizes that compliance among OPEC+ members is crucial for the effectiveness of production cuts.

Hapag-Lloyd and OOCL, major shipping companies, have joined others in avoiding the Red Sea due to attacks by Yemeni Houthi rebels. About 12% of seaborne oil trade and 8% of liquefied natural gas pass through Bab Al Mandeb, the strait at the southern edge of the Red Sea.

Oil futures trading around 1% higher on Friday. Investors continue to mull impacts of Red Sea disruption. Angola's move to quit OPEC caused rally to falter on Thursday.

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Saif

Forex

Australia is facing a critical point where attention is focused on economic indicators such as inflation rates and interest rates. The delicate balance between these factors has significant implications for the Australian economy, with market expectations playing a vital role in shaping the course. As the global economic landscape continues to evolve, experts are closely monitoring how these factors will impact the Australian dollar.

Australia, like many countries, is struggling with the challenge of managing inflation in a changing economic environment. In recent months, the country has seen a moderate rise in inflation, a result of factors such as supply chain disruptions, rising energy costs and increased demand for goods and services. The Reserve Bank of Australia has signaled its willingness to allow inflation to temporarily exceed the 2-3% target range, seeing it as a natural consequence of the post-pandemic economic recovery.

In response to inflation pressures, the RBA faces the delicate task of adjusting interest rates to maintain economic stability. Higher interest rates can help curb inflation by making borrowing more expensive, which reduces consumer spending. On the other hand, low interest rates may increase the risk of accelerating inflation. The Reserve Bank's decisions on interest rates are closely watched by financial markets, where expectations often influence investor behavior and the market landscape.

Market participants carefully follow the Reserve Bank's statements and decisions to assess the path of interest rates. The consensus among experts suggests that the Reserve Bank may adopt a cautious approach, with gradual adjustments to interest rates in response to evolving economic conditions. The central bank is likely to highlight its commitment to achieving a balance between inflation pressures and the need to achieve sustainable economic growth.

The relationship between interest rates and currency value is a proven economic principle. Generally, higher interest rates attract foreign capital, causing the local currency to appreciate. On the other hand, keeping prices low for a long period may inflate the currency. In the context of Australia, the interaction between interest rates and the Australian dollar depends on global economic dynamics.

If the Reserve Bank chooses a more conservative stance, signaling a willingness to raise interest rates, the Australian dollar may tighten as investors move towards higher yields. On the flip side, a conservative approach, where rates are kept low to support economic growth, could lead to a weaker Australian dollar as investors continue to look for higher returns elsewhere.

Australia faces a critical economic landscape based on rising inflation and the delicate task of adjusting interest rates to maintain stability. The delicate dance between these factors highlights the complexity of guiding the economy toward stability and growth. As the Reserve Bank continues to assess and respond to evolving conditions, market participants remain watching, knowing that the fate of the Australian dollar rests on this delicate balance. In a closely connected global financial system, Australia's economic decisions will shape not only its domestic future but will also reverberate across international markets. تحليل الوضع الاقتصادي في أستراليا: التضخم وأسعار الفائدة وتأثيرها على الدولار الأسترالي_1

تحليل الوضع الاقتصادي في أستراليا: التضخم وأسعار الفائدة وتأثيرها على الدولار الأسترالي_1

AUDUSD chart

The Australian dollar held near $0.68, falling on its own for less than five months, as expectations that the US Federal Reserve will start cutting interest rates next year were strengthened by the latest US economic data. Meanwhile, analysts noted that the Reserve Bank of Australia will likely be slower than its global counterparts in moving into an easing cycle because it has not raised as aggressively as other banks, which would likely lead to shallow or late cuts. Inflation in Australia has also shown greater persistence compared to other economies, with Reserve Bank of Australia Governor Michelle Bullock saying last month that the challenge was becoming "increasingly homegrown and demand-driven", and that getting the figure below 3% from around 5.5% now was likely to help. It will be a long-term process. Markets do not expect interest rate cuts by the central bank until the end of 2024.

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Thomas

Commodity

• Gas tariffs on European businesses and households are well above their 2015-2019 average and could remain above that level until at least 2031, according to Moody’s research.

• That’s despite storage being at record highs, meaning there are very little chances of shortages this winter.

• Consumers have not yet felt the full impact of the fall in wholesale prices, but geopolitical concerns are now adding to this landscape.

A feared European winter gas shortage has yet to materialize for the second year in a row — but consumers are set to stay stuck paying significantly higher rates than they used to.

A crisis situation was averted last winter, following a scramble to find new suppliers, reopen old storage facilities and roll out initiatives to reduce consumption in some energy-intensive areas, as flows from Russia dried up in the wake of its full-scale attack of Ukraine in February 2022.

According to research published by Moody’s this month, the EU had record high gas stocks of around 97.5% at the end November 2023, meaning both very low risk of energy shortages this winter and a strong position for the next cold season, analysts found.

“Europe’s improved energy reserves going into this winter are the result of the effectiveness of government actions on the supply and demand side, and consistent energy savings by both households and companies,” the Moody’s report stated, citing greater supplies of liquefied natural gas (LNG) in 2023, a higher availability of nuclear and hydropower plants and a mild winter as improving the situation.

Lower consumption has also been helped by economic stagnation in the continent, the report said.

Moody’s expects gas storage to be higher than previously anticipated at 55% at the end of March 2024.

Household and business bills

Yet, “European gas prices will remain high and volatile,” the report finds.

Energy has been one of the strongest forces pulling down inflation in recent months, after being a chief driver in hikes in consumer prices suffered in the immediate wake of Russia’s attack of Ukraine. Annual headline inflation was 2.4% in November in the euro zone, with energy showing disinflation of 11.5% year-on-year, even as the extent of price rises simply moderated in all other sectors.

In the U.K., gas price inflation has plunged by 31% in the year to November, figures from the Office for National Statistics showed.

But all that is a fall off the back of a very large spike.

Using Factset data, Moody’s found that European gas prices are well above their 2015-2019 average — and sees them remaining above this level until at least 2031. In 2020 and 2021, prices were below the average.

“The tariffs paid by households and industries are still historically very high,” James Waddell, head of European gas and global LNG at Energy Aspects, told CNBC by email.

“Movements in these prices generally follow movements in the wholesale gas market with a lag of several months, because of supplier hedging. So the fall in European wholesale gas prices from last year has not fully been passed through yet.”

Wholesale prices are overall around four times lower than they averaged over 2022, but still more than double what they were historically, Waddell said.

“This means that there are still price pressures on households and industries and in the case of the latter, increasingly we see interest in these firms relocating production outside of Europe.”

He also said that, despite healthy supply in the short term, concerns remain about the ability for European gas storage capacity to set itself up for the years ahead, since “stocks can be drawn down quickly in the event of cold weather.” That can also be the case if an increase in Asian demand pulls a lot of LNG away from Europe, he said.

Moody’s says gas prices will stay volatile primarily because of “increased geopolitical risks, which reflect their intrinsic vulnerability to supply disruptions.”

It cites various downside risks to its gas market outlook, including a further cut in Russian pipeline supply and episodes of supply disruption, as seen in the strikes at Australian LNG facilities earlier this year.

Additional volatility has arisen following the Israel-Hamas war, which has lifted risk premiums and driven spot gas prices higher despite Europe’s relative distance from the conflict, researchers say.

According to Moody’s, “Under the unlikely adverse scenario where the conflict could escalate to the broader region with the direct involvement of Iran, European gas prices could spike to similar levels seen following Russia’s attack of Ukraine. This scenario would hurt economic activity and add further challenges for energy-intensive sectors.”

Source: CNBC

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Warren Takunda

Central Bank

Economic

In a development that caught the attention of investors and economists alike, Japan's annual inflation rate slipped to a 16-month low of 2.8% in November 2023, marking a notable decline from the previous month's figure of 3.3%. This dip, the steepest since July 2022, has raised concerns and is expected to influence economic sentiment in the coming months.

Sectoral Impact

The subdued inflationary trend was predominantly led by a deceleration in the rise of food prices, which experienced the slowest increase in 10 months, registering at 7.3% compared to October's 8.6%. Contributing to the downturn were also moderations in costs across various sectors, including transport (2.8% vs 3.2%), housing (0.7% vs 0.8%), furniture & household utensils (6.1% vs 6.9%), clothes (2.8% vs 3.0%), culture & recreation (7.5% vs 6.4%), and miscellaneous (1.5% vs 1.6%).

Persistent Challenges in Energy:

A consistent challenge continues to be the decline in prices of fuel and light, marking the tenth consecutive month of contraction (-11.4% vs -10.0%). This was primarily driven by decreases in electricity (-18.1% vs -16.8%) and gas (-11.6% vs -10.2%). Such a prolonged contraction raises questions about the resilience of the energy sector and its potential impact on overall economic stability.

Core Inflation and Policy Dilemma:

In tandem with the overall inflation trend, the core inflation rate also witnessed a decline to 2.5%, marking the lowest in 16 months. This aligns with market expectations but poses a persistent challenge for the Bank of Japan (BOJ), as it extends beyond the central bank's 2% target for the 20th consecutive month. The central bank, however, maintained its accommodative monetary settings during the December policy meeting, offering no explicit signals of impending adjustments towards policy normalization in the coming year.

Market Response:

In response to the inflation data, Japanese shares experienced a mixed but cautiously optimistic response. The Nikkei 225 Index edged up by 0.09% to close at 33,169, while the broader Topix Index gained 0.45% to 2,336 on Friday. The market rebound followed a broader trend observed on Wall Street, as investors continued to speculate about the Federal Reserve's potential interest rate cuts in the coming year.

To stay updated on all economic events of today, please check out our Economic calendar

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Owen Li

Economic

Britain's economy might now be in a recession according to data which showed output shrank in the July-to-September period, shortly after finance minister Jeremy Hunt suggested the Bank of England might cut interest rates to help boost growth.

Gross domestic product contracted by 0.1% in the third quarter, the Office for National Statistics said on Friday.

It had previously estimated that the economy showed no change compared with the previous three months and economists polled by Reuters had mostly expected another unchanged reading.

The ONS also said economic output in the second quarter was now estimated to have shown no growth, a downwards revision from a previous estimate of 0.2% growth.

However, separate data showed retail sales in November jumped by much more than expected, increasing by 1.3% from October, boosted by discount sales.

Sterling rose against the dollar and the euro after the data releases.

Finance minister Hunt, whose Conservative Party is lagging far behind the opposition Labour Party in opinion polls ahead of an expected election next year, said the outlook for the economy was not as bad as the updated official figures suggested.

"The medium-term outlook for the UK economy is far more optimistic than these numbers suggest," he said in a statement.

Separately, in an interview with the Financial Times published late on Thursday, Hunt took the rare step of commenting on the BoE's interest rate decisions.

"There's a reasonable chance that if we stick to the course we're on, we're able to bring down inflation, the Bank of England might decide they can start to reduce interest rates," Hunt told the newspaper.

The ONS said fresh tax data showed smaller businesses in particular had struggled in the second quarter, especially hospitality and information technology, and the broader picture for the economy was one of little change over the last year.

The boost to retail sales volumes reflected heavy discounting during the Black Friday sales promotions but sales fell over the three months to November and were still below their pre-pandemic levels, the statistics office said.