2023.05.03 2023.05.03
Franc takes growth vitamin. Forecast as of 03.05.2023Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/
Being encouraged by an upcoming economic recession in the USA, the USDCHF bears go ahead. Despite the slow pace of the SNB monetary tightening, the franc is stable.
Monthly Swiss franc fundamental forecast
Haste makes waste. Although the SNB’s monetary tightening is far less aggressive than other regulators, the CHF could outperform the GBP and be the G10 top performer. The sterling is supported by the undervalued potential of the UK economic expansion. The USDCHF bears are encouraged by the expected US economic recession. Franc looks more attractive as a safe haven than the US dollar or the Japanese yen.
Unlike the Fed or the ECB, which meet and discuss monetary policy eight times a year, the SNB does this only four times. This can also explain the slower monetary restriction in Switzerland compared to other central banks. Since the beginning of the cycle, the SNB interest rate has increased by only 225 basis points. For comparison, New Zealand raised it by 500 basis points, the US – by 475, Canada by 425, and the UK – by 415. At the same time, the leadership of the franc proves that it is not the act of tightening monetary policy itself that is important but the expectations of such a step. Moreover, in the case of the Swiss National Bank, these steps were quite broad from time to time.
Monetary restrictions by central banks overseeing G10 currencies
Source: Reuters.
It is important that the SNB, unlike the Fed, is not going to end its rate hiking cycle. It follows the path of the ECB because the euro area is the largest sales market for Switzerland. In such circumstances, it is important to keep the franc close to parity with the euro. And if the European Central Bank will not stop, then neither will the SNB. If the EURUSD continues to grow, USDCHF will most likely develop a downtrend.
According to Europe’s largest asset manager Amundi, there is currently a tectonic shift in the investors’ viewpoint, as the ECB is not only tightening monetary policy but also abandoning the negative rates introduced in 2014. Growing demand for European bonds has already led to a €300 billion capital repatriation to Europe since June 2022, and this is just the beginning.
And yet, the main franc benefit is not the SNB’s willingness to follow the ECB but rather the expectations of the US recession. Fed’s most aggressive monetary tightening in decades is causing problems for the US economy. And, most likely, they will grow, which, amid excessively inflated Treasuries shorts, will ensure a drop in Treasury yield if the US domestic data are weaker than expected.
Dynamics of hedge funds positions and Treasury yield
Source: Bloomberg.
Monthly trading plan for USDCHF
I don’t think the Fed can change anything. The topic of recession is deeply embedded in investors’ minds, so the high interest in the franc will continue. At the same time, the market is confident that the ECB’s interest rate will rise to 3.75%, and the SNB will try to keep up with the European Central Bank. In this climate, it is still relevant to enter the USDCHF short trades and add up to them with targets at 0.88 and 0.865.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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