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Swiss deflation softer-than-estimates, gold in demand

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The Swiss consumer prices fell 0.4% on month to January, slower than -0.6% m/m expected amid Swiss consumer appetite on significant price discounts helped curbing deflationary pressures after January 15th surprise EURCHF floor removal. CHF traders gave little reaction to CPI release. EURCHF continues trading choppy above 1.05, while USDCHF tests offers pre-200-dma as the safe-haven flows remain in charge on Grexit fears. According to UK’s Royal Mint report, Greek sovereign coin demand and physical Chinese demand lends support to gold prices, XAUUSD trends back toward its 200-dma.

Swiss consumer appetite curbs deflationary pressures amid the free-float EUR/CHF

The Swiss consumer prices decelerated at the slower-than-expected pace of 0.4% (vs -0.6% exp. vs -0.2% last) on month to January amid the SNB surprisingly removed the EURCHF floor on January 15th. Deeper deflation was expected as the Swiss stores apply significant discounts (above 20%) on import products aiming to prevent consumers from spending abroad since the end of EURCHF floor. Deflationary pressures will certainly remain in Swiss headlines for months ahead, also sustained by significantly lower oil prices and mid/long term negative pressures on the euro. Regarding the internal forces however, the Swiss consumer appetite is currently not damaged after the EURCHF removal. In contrary, as the labor market takes longer to adjust, the heavily discounted prices create interesting yet temporary rise in Swiss purchasing power.

Therefore, we expect the better Swiss consumer appetite to curb the EUR/oil-related price deceleration in the short-run as Swiss households look to take advantage of the transitory rise in their purchasing power.

Swiss consumers are well aware that the situation will be short-lived, first because the SNB is suspected to intervene to regularize the franc’s value especially as the Grexit fears increase the safe-haven demand across the globe. Second, because the post-Jan 15th impact on Switzerland’s trade and account balances could only push the franc downwards given pressures of weaker demand in Swiss goods and services that have significantly lost competitive advantage on the international platforms. The Swiss macroeconomic situation should tend to a balanced state starting from Q2, 2015. Only then deflationary pressures should weigh heavier as wages adjust to free floating EUR/CHF.

Gold rebounds from 50-dma

The safe-haven demand in gold lends support to XAUUSD sell-off amid last Friday’s post-NFP dollar rally. On February 6th, XAUUSD broke aggressively below the 200-dma for the first time after the SNB surprisingly removed the EURCHF floor and extended losses to hit the 50-dma. While the bearish momentum suggests that XAUUSD has room for deeper downside correction toward $1,200/1,220 (Fibonacci 38.2%/50% on Nov’14-Jan’15 rally), counter forces are building to meet the gold sell-off. Not only the Greece-related fears, but also sovereign Greek demand in coins (according to UK’s Royal Mint report) and Chinese physical gold demand before the Lunar New Year holidays are shown as major counter-trend factors in gold market nowadays. The ETF’s gold holdings increased from 1,595 to 1,678 metric tons since mid-January after the SNB surprisingly removed the EURCHF floor. XAUUSD advances to $1,245, a stone’s throw lower than the 200-dma ($1,251.24). Large vanilla calls maturing this week should further help the recovery if XAUUSD makes its above $1,250.

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