SALES AND MARKET COMMENTARY – THIS IS NOT INVESTMENT RESEARCH AND IS INTENDED

FOR INSTITUTIONAL INVESTORS ONLY

January 31, 2023

Global Trading Solutions
FX Strategy
Global

FX Compass
TRADING STRATEGISTS
Looking for cracks
Shahab Jalinoos
Figure 1: FX and rates vol at multi-month lows ahead of CB meetings 212 325 5412
15 EURUSD 3m implied vol (%) 160 Alvise Marino
13 US 3m10y swaption vol (bp/yr, rhs) 212 325 5911
140
11 Günter Grimm
120 41 44 335 76 93
9
Daniel Chodos
7
100
54 11 4131 2707
5 80 Maximillian Lin
Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 65 6306 8809
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Alexander Kolyandr
44 20 7888 1257
With a month of USD weakness, strength in risky assets and falling volatility in the
rear-view mirror, investors are approaching this week’s packed schedule of central
bank decisions, corporate earnings and data releases with a bias to look for cracks
in the prevalent market narrative. The pause in USD weakness since mid-Jan
speaks to these cautious intentions, but elements on the ground continue to evolve
in a manner suggesting the current trend as still the path of least resistance. Further
evidence of slowing US wage momentum and strong data surprises in China are the
latest examples on this front. Ahead of this week’s deluge of macro event risk, this
leaves our cautiously constructive stance on pro-risk FX pairs intact.
Of this week’s central bank decisions, today’s FOMC stands to be the most
anticipated and the least interesting. Markets anticipate a 25bp hike, and further
FOMC pushback against the priced in outlook for rapid H2 cuts. With no dot plot or
SEP revision on the docket at this meeting to reinforce the message, we see a high
bar for markets to find this pushback suddenly more convincing. As for tomorrow’s
ECB decision, a 50bp rate hike is a near certainty. Markets will focus on guidance,
where risks still lean marginally hawkish: the recently more mixed tone of activity
data leaves us however doubtful that this could translate to a fresh wave of lasting
EUR strength. We still look to take profits on EUR longs at 1.0950. Lastly, we
suspect that markets will need to see a minimum of a 50bp hike with hawkish
guidance from the BOE in order to view GBP as a viable pro-risk FX candidate.
This week we also look at CNH. The China re-opening story continues to evolve in a
constructive fashion, with services PMI posting a strong rebound in Jan. This said,
local equity markets have traded lower this week. With equity sentiment slowing, we
think trade dynamics are now set to become the main driver of the yuan and expect
a weak export outlook and faster imports growth to drive trade-weighted yuan
weakness. We think long AUDCNH is a good expression of this theme and look to
fade weakness in AUDCNH below 4.68, targeting 4.95. We maintain our
USDCNH forecast range of 6.65-7.00, as we expect USD weakness to offset
depreciation in the trade-weighted yuan.

PLEASE REFER TO THE IMPORTANT INFORMATION AND DISCLOSURES SECTION AND CONTACT YOUR CREDIT
SUISSE REPRESENTATIVE FOR MORE INFORMATION.
31 January 2023

Macro Overview
Looking for cracks Alvise Marino
212 325 5911
With a month of USD weakness, strength in risky assets, and falling volatility across asset
classes in the rear-view mirror, investors are approaching this week’s packed schedule of
central bank decisions, earnings and economic data releases with a bias to look for cracks
in the prevalent market narrative. But while the pause in broad USD weakness since mid-
Jan speaks to these cautious intentions, various elements on the ground continue to
evolve in a manner that is still suggestive of an extension of the current trend as the most
likely path of least resistance. Specifically:
1) No pushback in US data against “immaculate disinflation” and “soft landing”. The
slowdown in the US employment cost index growth from 1.2%qoq in Q3 to
1.0%qoq in Q4, published yesterday, further solidified the market’s already benign
view around the near-term Fed policy risks. At the same time, resilient US jobless
claims data still serve as an offsetting counterfactual to ongoing layoffs in the US
tech and financial services sectors. This further supports the “immaculate disinflation”
and “soft landing” scenarios, which seemed far-fetched and were frequently
dismissed as wishful thinking for most of 2022.
2) The Chinese growth rebound looks increasingly solid. The latest data points on
Chinese activity have surprised strong, with a monumental rebound in the non-
manufacturing PMI from 41.6 in Dec to 54.4 in Jan dominating the post-Lunar New
Year holiday news flow. The improvement in the Chinese growth outlook also
featured prominently as a driver of the IMF’s global GDP growth forecast upgrade in
its 2023 World Economic Outlook, released yesterday. The limited response in CNH
and in local asset markets to this news speaks to the well-owned nature of the long-
China position, a topic which we address in detail later in the FX Compass. But in the
meanwhile, the broader story of Chinese growth rebounding has been further
validated by data. Notably, considerations about possible inflationary implications of
the Chinese growth rebound remain still far from the market spotlight.
3) European growth and inflation data still support hawkish ECB policy risks. Resilient
Q4 aggregate euro area GDP growth on the one hand, at 0.1%qoq vs -0.1%qoq
consensus, and stable/firmer Jan CPI inflation prints in individual member countries
(most notably, Spain) on the other, also provide further support for the well-
established view that ECB policy risks lie firmly in the hawkish direction. Preliminary
euro area CPI data for the month of January will be of interest today on this front,
with consensus expectations set for slower headline and core CPI (8.9%yoy and
5.1%yoy respectively, from 9.2%yoy and 5.2%yoy in Dec).
Our view set since early Jan (link) has been biased towards tactical USD weakness in the
early part of Q1. While we acknowledge that some of these views are by now well-owned,
we also note that the evolution of the underlying macro picture has not provided clear
arguments for taking the opposite view thus far this year. This has proven particularly
powerful against a market consensus that largely leaned defensive on risky assets in early
Jan. It is also one of the reasons that drove us to moderate our EUR tactical stance last
week, when we switched from recommending going short EURUSD once it reached our
near-term 1.0950 target to calling for taking profits at that level instead. Ahead of this
week’s deluge of macro event risk, we still see this view as appropriate and retain a
cautiously constructive stance on pro-risk pairs, targeting 1.0950 in EURUSD, 0.7150 in
AUDUSD and 1.2450 in GBPUSD.

FX Compass 2
31 January 2023

USD: Fed fighters zero in on credibility of FOMC pushback

Of this week’s central bank decisions, today’s FOMC stands to be the most anticipated
and at the same time the least interesting. Market expectations for this meeting have
solidified around a 25bp rate hike, prompted by explicit guidance from a wide range of
Fed officials in recent weeks and by generally compliant economic data. Beyond today’s
decision, markets expect slightly more than one further 25bp hike, followed by a pause at
a terminal rate of ~4.90%. The most likely point of contention in today’s rate decision is
the priced-in view that the Fed will then rapidly pivot in the opposite direction, with SOFR
futures implying one 25bp rate cut already by the 1 Nov meeting, and a total of ~140bp
worth of easing baked in between the Jun 23 and the Jun 24 contract.
Fed officials have unanimously pushed back against this pivot scenario in Jan, pointing
instead to a prolonged pause at the terminal rate, above 5.0%, as the preferred policy
outcome. A restatement of these concerns in Chair Powell’s press conference is widely
anticipated today. Our economists (link) also flag the possibility that the FOMC statement
might still feature language stating that ‘ongoing rate increases will be appropriate’, which
might initially be seen as a hawkish development. This said, with no dot plot or SEP
revision on the docket at this meeting to reinforce the message, we see a high bar for
markets to find this pushback suddenly more convincing. Many commentators have noted
that markets appear to be making the proverbial mistake of fighting the Fed: we do not
disagree, but we also acknowledge that the news and data that markets need to see in
order to stop fighting the Fed have simply not materialized thus far.

Figure 2: US market-based inflation expectations Figure 3: EURUSD risk reversal skews still bid for
have been stable to lower since Q4 puts vs calls amid hawkish ECB expectations
EURUSD 25-delta risk reversal skews (%)
3.20 USD 5y5y inflation swap (%) 0.50
1w 1m 3m 6m
US 10yr inflation breakeven (%)
3.00 0.00

2.80 -0.50

2.60 -1.00

2.40 -1.50

-2.00
2.20
-2.50
2.00
Sep-22 Oct-22 Nov-22 Dec-22 Jan-23
Jan-22 Apr-22 Jul-22 Oct-22 Jan-23

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

What would seriously challenge our view is a decision to hike 50bp instead of 25bp today.
This, to be clear, is a very low probability outcome, especially after yesterday’s softer ECI
data. A surprise 50bp hike would raise serious credibility issues given clear guidance from
officials ahead of the blackout period in the direction of a 25bp hike. Furthermore, with
economic data largely supporting a downshift in the pace of tightening and inflation
expectations stable, such a decision would be viewed as entirely driven by the recent
easing in financial conditions. This in turn would suddenly force investors to contend with a
much wider range of possible policy outcomes, with heightened volatility across asset
markets as a defining feature. As such, we think it is appropriate to view this as a far tail
risk. This said, a world in which the Fed were to view the recent rapid easing in financial
conditions as a serious risk to its inflation outlook is less far-fetched than it has been at

FX Compass 3
31 January 2023

any point in recent history. And while such concern may not manifest in another 50bp hike
today, we are unwilling to write it off as a key risk to our view.

EUR: Still hawkish risks, mixed FX implications

With a 50bp rate hike to 2.50% at tomorrow’s ECB rate decision a near-certain outcome,
investor focus will be split across a variety of policy tools, making for a more complex rate
decision than today’s FOMC. The immediate point of focus will be whether President
Lagarde reiterates the message from the 15 Dec rate decision that current market pricing
is insufficient to bring inflation down. A rerun of the same message would represent a
hawkish surprise, considering that the market-implied terminal rate has increased from
~2.80% in mid-Dec to slightly below our economists’ forecast of 3.50% at the time of
writing. Our European economist Veronika Roharova summarizes here the possible
permutation of changes in the Governing Council’s rate guidance, and of its assessment
of growth and inflation risks. Additional details are also expected today on the
composition, flexibility over time and conditionality of the balance sheet runoff, which is set
to start at EUR15bn/month pace in March.
We have been tactically constructive EURUSD with a 1.0950 target in Q1 so far and note
that the possible outcomes of tomorrow’s ECB meeting that challenge our view seems
somewhat limited. A hawkish surprise, featuring an unchanged rates guidance, would
likely initially push EURUSD to our 1.0950 target and possibly through it. At the same
time, such an outcome could also quickly bring markets to price in faster ECB rate cuts
beyond the terminal rate – a EUR negative factor, all things equal. The more mixed recent
activity data is a new reason to consider this scenario, with terms of trade and net exports
accounting for nearly all of the Q4 euro area GDP data surprises, and weak German Dec
retail sales data meanwhile casting fresh doubts on the consumer demand outlook.
On the opposite end of the policy spectrum, a dovish outcome would likely require an
explicit downgrade of inflation risk assessment, along with a stronger emphasis on slowing
headline CPI pressures, rather than on still rising core inflation. While a surprise pullback in
Jan euro area core CPI today would make such outcome suddenly more plausible, recent
consistently hawkish commentary from ECB officials suggests it is still less likely than the
hawkish surprise scenario we envision above, as things stand. In FX options, the demand
for OTM EUR calls vs puts implied by risk reversal skews has moderated somewhat
compared to the beginning of the year (see Figure 3), with puts still trading at a premium
to calls: along with the asymmetric guidance risk profile, this leaves us comfortable with
our modest pro-EUR bias and with our call to take profits on EUR longs at 1.0950.

GBP: Once again, the dark horse

Market expectations for tomorrow’s Bank of England rate decision are also set for a 50bp
hike. The meeting however presents investors with a wider range of possible outcomes to
ponder, compared to the FOMC and the ECB meetings. The following drive this view:
1) Less consistent policymaker views. Governor Bailey’s comments on 16 Jan on
increased inflation risks from labour market tightness were a notable hawkish
departure from the “good news” rhetoric on UK inflation data that prevailed instead
after the previous rate decision, on 15 Dec 2022, when the BOE hiked 50bp to
3.50%. The diverse backdrop of views in the MPC that emerged at the time, with
two members voting to keep policy unchanged, has likely been an obstacle to
investors’ willingness to reprice the near-term BOE policy outlook in a more forceful
fashion, even amid more hawkish-sounding comments from core MPC members.

FX Compass 4
31 January 2023

2) Always glass half-empty. The news flow around UK economic data and policy
developments has leaned relatively more pessimistic, with news report of pervasive
strikes and of troubling (but largely backward-looking) UK fiscal numbers frequently
overshadowing other more constructive developments. The more robust Nov and
Dec employment data, and the recent tentative softening in the tone surrounding
Northern Ireland Protocol negotiations with the EU fall under this category.
While this lingering market wariness in UK assets has been hard to shake off in equities,
where UK indices continue to underperform their continental peers despite a comparable
terms of trade boost , in FX prospects have brightened somewhat, with GBP ranking as
the 2nd best performing currency vs the USD YTD, in line with our bullish 1.2450
GBPUSD Q1 target. Against EUR, the improvement has been much more modest,
keeping EURGBP within the boundaries of our 0.8700-0.8900 target range.
A hawkish surprise from the MPC tomorrow could provide a near-term boost to GBP. But
with markets already pricing in a 50bp hike, the question of what exactly constitutes a
hawkish surprise arises. Our economists expect a 6-1-2 split in the vote, with six MPC
members voting for a 50bp hike, one for a 25bp hike and two for an unchanged outcome
(link). Given the recent history of BOE disappointing relative to market expectations, we
suspect that a 50bp hike with hawkish guidance from Governor Bailey is the bare
minimum that markets need to see in order to consider repricing the policy rate outlook
higher, in line with our economists’ terminal rate estimate of 4.50% (currently ~4.35%). A
shift in the voting pattern, with one of the two members who voted for no change in Dec
voting instead for a rate hike, would be a very helpful development in that regard.
The surprise risk is however two-sided, with still plenty of less constructive factors (such
as yesterday’s weak mortgage approvals data) that dovish-leaning policymakers could
possibly opt to grab on to. In that sense, a 50bp hike paired with dovish guidance would
likely undermine resurgent market interest in GBP, while a 25bp hike would likely
encourage yet another round of GBP shorting. Neither is our base case, given recent
hawkish commentary from Governor Bailey.

FX Compass 5
31 January 2023

CNH: Immune to good news

The China re-opening story remains a positive one, with intra-country tourism rising 30%
Maximillian Lin
from last year’s Lunar New Year holiday (and close to pre-pandemic levels). January PMI
65 6306 8809
also surprised higher, with services PMI posting a strong rebound.
Despite this positive PMI data and continued optimism on the ground, Hang Seng and
China equities traded lower this week ahead of FOMC, and the yuan weakened slightly.
We think this is a signal that optimism is fully priced, and that further equity inflows will be
marginal. With equity inflows slowing, trade dynamics will be the main driver of the yuan,
and a weak export outlook and higher imports point to trade-weighted yuan weakness.
We think long AUDCNH is a good expression for trade-weighted yuan weakness. We
look to fade weakness in AUDCNH below 4.68, and target 4.95. For USDCNH, we
maintain our forecast range of 6.65-7.00, as we expect USD weakness to offset
depreciation in the trade-weighted yuan.
Services PMI and high frequency data point to consumption recovery
Although China onshore markets remained shut during Lunar New Year holidays last
week, the news flow and re-opening sentiment remained positive. High frequency data
such as daily box office receipts released last week showed a strong rebound in cinema
sales during the first few days of the holiday. As the holiday neared its end this past
weekend, Chinese travel booking sites reported a 30% increase in domestic tourism
bookings from last year.

Figure 4: Jan Services PMI rebounded strongly Figure 5: Manufacturing new orders also rose in Jan
Services PMI (sub-index of NBS non-manufacturing PMI) since 2022 January NBS Manufacturing PMI by sub-index
56.0 China Services PMI 53.0
54.3 54.0
54.0 Mar-Apr 52.8 Nov-Dec
Shanghai 51.9 Rising 52.0 Suppl. Deliv.
52.0
50.3 50.5 lockdown Covid cases (15% wt.)
50.0 51.0 52.4 New Orders
(30% wt.)
48.0 48.9 Total Mfg PMI: 50.1
50.9
46.0 47.1 50.0
46.7 47.0
Production
44.0 45.1 Employment
(25% wt.)
49.0 (20% wt.)
49.8
42.0 47.7
Inventory
40.0 48.0 (10% wt.)
40.0 49.6
38.0 39.4
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 47.0
2022 2022 2022 2022 2022 2022 2023 0% 20% 40% 60% 80% 100%
Cumulative weight in overall PMI

Source: Credit Suisse, China National Bureau of Statistics Source: Credit Suisse, China National Bureau of Statistics

Official PMI data paint a similar story of a strong consumption rebound. January non-
manufacturing PMI (comprised of services PMI and construction PMI) surprised to the
upside (54.4 vs consensus 52.0). After contracting to 39.4 in Dec – lows not seen since
the first Covid wave in Feb 2020 – services PMI rebounded to 54.0 in Jan (Figure 5).
Although pent-up demand will likely slow in Feb and Mar, services activity in China will
likely see continued expansion for an additional 3-4 months as retail spending continues.
Services PMI showed a 3-month recovery in Jun-Aug after the Shanghai lockdown
January manufacturing PMI was in-line with expectations (at 50.1), just slightly in
expansion territory. Figure 5 shows that the larger-than usual collapse in labour supply due
to the holidays (the first Covid-free Lunar New Year migration in three years) was offset
by an increase in domestic new orders and improvement in supplier delivery times as
Covid screening / checkpoints were eliminated. The export outlook remains weak – the

FX Compass 6
31 January 2023

January new export orders PMI came in at 46.1 and has been below 50.0 since April
2021 – but the revival in domestic demand should help overall manufacturing PMI remain
in expansion in for the remainder of Q1.
CNH and equities (a consensus long) ignore the holiday cheer
Strangely enough, when China onshore markets resumed trading after the weeklong
holidays on Monday, the optimism was short-lived. The Shanghai Composite opened
1.4% higher, catching up with the week of gains in the S&P 500, but promptly gave up
gains on Monday afternoon and on Tuesday (Figure 6).
Hong Kong equities (which resumed trading last week) initially greeted the high frequency
data with a rally – rising by 2.4% on 26 Jan. However, the Hang Seng later gave up
gains and fell 3.7% on Monday and Tuesday, back below pre-holiday levels. Similarly,
CNH rallied by small amounts on Monday morning – appreciating by 0.25% to 6.7400 –
before weakening 0.4% (to 6.7600) over the next two days, amid USD strength.

Figure 6: The post-holiday rally in Hang Seng and the Shanghai Composite was short lived due to Fed risks
Indexed performance of S&P 500, Hang Seng and Shanghai Composite – last two weeks

Re-Indexed S&P 500 Futures (17 Jan = 100) Re-Indexed Hang Seng Futures (17 Jan = 100) Re-Indexed Shanghai Composite (Onshore hours)

106.0 31-31 Jan

19-20 Jan China onshore resumes
105.0
Re-opening optimism 23-25 Jan Global equities
104.0 before Lunar New weaken ahead
Hong Kong Holiday 26 Jan
103.0 Year holiday of FOMC
Hang Seng
102.0 rises 2.4%
101.0
100.0
99.0
23-27 Jan
98.0
Onshore China Holiday
97.0
17 Jan 18 Jan 19 Jan 20 Jan 23 Jan 24 Jan 25 Jan 26 Jan 27 Jan 30 Jan 31 Jan
(Tue) (Wed) (Thu) (Fri) (Mon) (Tue) (Wed) (Thu) (Fri) (Mon) (Tue)

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service

We suspect pre-Fed positioning is driving both the yuan and China equities. China’s
emergence from Covid has been the dominant theme for Asian equities since November,
and as a result long China has been the consensus position for EM equity investors. Given
investors are already overweight China, even the positive retail/tourism news and the PMI
surprise failed to result in further yuan or China equity appreciation.
In the 18 January FX Compass (link) we noted that once equity optimism becomes fully
priced and portfolio inflows start to slow, we think the rebound in Chinese imports will
become the main driver of the yuan. Price action this week – with the yuan and equities
weakening ahead of FOMC, suggests that inflows have reached their saturation point.
As such, we now expect the yuan to weaken in trade-weighted terms, and we like to go
long AUDCNH as a proxy for CFETS RMB weakness, as well as for stronger Chinese
demand for Australia’s commodity exports. However, we are mindful that a potentially
hawkish FOMC press conference this week could negatively impact AUD more than CNH
in the short run, given the prevalent long positioning build up in the former. Therefore, we
look to fade weakness in AUDCNH below 4.68, and target a rally in this FX cross rate to
4.95. For USDCNH, we maintain our forecast range of 6.65-7.00, as we expect USD
weakness to offset depreciation in the trade-weighted yuan.

FX Compass 7
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