As EURCHF is barely moving, trading within a 60-pip range (1.2120 – 1.2180) over the past month and a half, EURUSD and USDCHF continues to trade almost ‘perfectly inversely’. Over the past the 18 months, the correlation between the two pairs stands at -97%. The ECB’s May conference followed by the introduction of a package of ‘easing’ measures from ECB policymakers have triggered a Dollar Strength environment. As you can see it on the chart below, EURUSD (black bar) is down 6.5 figures while USDCHF (orange bar) is now trading almost 4 figures higher at 0.9075.
In addition, the 6 consecutive NFP prints above the 200K level and a better-than-expected GDP print (Q2 GDP first estimate came in at 4.0%) played in favour of the US Dollar over the past few months. Yellen sounded quite hawkish at her last testimony in front of the Congress, and it seems that US policymakers have regained some confidence concerning their ST monetary policy (according to the July FOMC meeting).
However, it didn’t take too long to see weak figures again. Yesterday, Mortgage applications fell 2.7% in the week ended August 8. The smoothed 4-week moving average is now back to September 2000 levels despite lower Mortgage rates (30-year Mortgage Rate is now stands at 4.35%, down from 4.7% in January). Moreover, we saw slightly later that retail sales missed expectations for the third month in a row with an unchanged flat print in July (vs. expectations of a 0.2% rise and down from the 1.5% growth rate seen in March). With retail sales accounting for one third of consumer spending in the US, the IMF cut once again (end of July) its 2014 growth forecast from 2.0% to 1.7% after the National Retail Federation cut its 2014 retail sales growth outlook from 4.1% to 3.6% (Winter blamed).
If we have a look at the chart below, we can see that the US Dollar has been stable since the beginning of August. We are pretty much bearish on the Euro based on poor fundamentals (Q2 GDP first estimates disappoints again and came in at 0.0%) and aggressive ECB easing; our EURUSD medium term target (H2 2014) stands at 1.3000, which corresponds to July 2013 levels. Investors could potentially fly to the Swissie in the middle of this high-pressure geopolitical environment. We think that EURCHF is on its ‘slow’ way to test the 1.2000 SNB once again. Therefore, with a EURUSD target at 1.3000 and EURCHF at 1.2000, it gives us a USDCHF MT target at 0.9200.