• USD to outperform on relative monetary policy and growth
• Weak Swiss data has increased the likelihood of an SNB rate cut
• From a risk/reward perspective, we prefer USD/CHF to EUR/USD
Strategy
On Friday, the USD fell against all G10 currencies following weaker-than expected non-farm payroll figures. EUR/USD trades 0.7% higher than before the announcement, while USD/CHF has fallen more than 1%. Technically, USD/CHF trades slightly above neutral with RSI-14D at 59, while our short-term financial models indicate that USD/CHF trades spot on the model’s fair value estimate of 0.964. The IMM data from the week ending 4 November (see IMM Positioning: Bearish EUR bets regain momentum, 10 November) show that speculative long USD positions are record high. Indeed, speculators remain long USD against all currencies in the report – something that before October this year had happened in only one week since 2000. However, we expect any sell-off in the USD to be modest as, in our view, the market will use all opportunities to position for a stronger USD.
Fundamentals
The US employment report was a slight disappointment on the surface, not least against fairly upbeat market expectations. However, in our view, the report was actually quite strong and the unemployment rate is on track to hit the Fed’s long-term estimate of 5.4% in early spring next year (see Flash Comment: US labour market tightens faster than Fed is expecting, 7 November). We expect the Fed to deliver the first rate hike in June next year but the risk is skewed towards an earlier hike. The market is pricing the first hike in October/November. In addition, it also prices too few hikes in our view. The end-2015 rate is priced at 0.6% versus the Fed projection of 1.375%. We expect EUR/CHF to edge gradually higher towards 1.24 in the coming 12 months, driven mainly by a reversal of safe-haven flows and an increase in Swiss portfolio investments abroad. While the Swiss gold referendum on 30 November and speculation about additional ECB easing could add further downside pressure on EUR/CHF in the short term, speculation about additional ECB easing and a weaker euro also increases the likelihood of a reaction from the SNB. Moreover, the low level of inflation and given that both the KOF leading indicator and M3 money growth are slowing, the likelihood of a SNB rate cut to negative in December has increased. We expect the SNB to maintain its 1.20 minimum target for EUR/CHF for a prolonged period. Thus, with EUR/CHF below 1.2050, we prefer to enter a long USD/CHF relative to a short EUR/USD position from a risk /reward perspective. We forecast USD/CHF at 0.99 in 3M and 1.02 in 6M but highlight that risks are skewed towards these targets being reached faster than expected.
To Read the Entire Report Please Click on the pdf File Below