Afternoon analysis 15.06.2016

The Swiss National Bank meeting is scheduled for tomorrow. The US industrial production data was markedly below expectations. The zloty keeps small gains, but the environment remains tense.

The SNB meeeting

Besides issues regarding Brexit and evening message from the Federal Reserve some attention should be focused on tomorrow’s Swiss National Bank (SNB) meeting. The key will be how serious the UK referendum is taken into consideration.

From June 6th the franc strengthened to the euro around 2.5%. The EUR/CHF pair tested the lowest levels since the beginning of the year. A strong capital inflow to the Swiss currency is probably not only a result of fears regarding weaker growth, slower investments in the EU or less household consumption. When there were fears on China earlier in the year there was no Swiss franc appreciation to the euro.

It is possible that Brexit regarded more as systemic risk. Of course, current fears are at much smaller scale comparing to the concerns regarding euro zone survival in 2012 but it looks that the move is quite strong. Additionally if Britain decides to withdraw from the UE there is a high probability that the Swiss currency would strengthen further.

In the SNB press release, similarly to the March statement, we will probably able to read that “The Swiss franc is still significantly overvalued” and the central bank “will remain active in the foreign exchange market, in order to influence exchange rate developments where necessary”. In the latter part it is possible that some concerns about the Brexit would be mentioned.

Sometimes after the press conference Thomas Jordan, the SNB chief is interviewed by financial media. It may be a good opportunity to “warn” “hot money” that further interventions are possible. The more activity form the SNB the higher probability that the franc may slightly weaken or appreciate less in the Brexit scenario.

Weaker US data. The zloty slightly stronger

Yesterday we noted quite good retail sales numbers from the US. Today, however, the industrial production is disappointing. It dropped on the monthly basis by 0.4% with expectations at minus 0.2%. Additionally the April reading was revised downwards by 0.1 percentage point.

The yearly data doesn’t look good. Comparing to May last year the production dropped by 1.4%. Even excluding the mining sector which shrank by 11.5% y/y and focusing only on manufacturing the result also looks weak and shows contraction by 0.1% y/y.

It was also surprising that production of motor vehicles and parts dropped by 4.4% in may. It pushed the yearly reading below zero while earlier quarters were characterized by solid gains. Today’s reading are supporting our stance that the FOMC should remain fairly neutral in the evening.

The zloty keeps around half percentage point gains since the morning. The situation, however, remain nervous. The recent changes on the PLN suggest significant sensitivity to the global news including British referendum polls. This situation is not expected to change in the following days. Two or three polls which shows that the Brexit supporters gain momentum might push the foreign currencies higher by 1-1.5%. Combining it with expected global appreciation of the franc it cannot be excluded that the CHF/PLN may move toward 4.15-4.20 even before the referendum result.