• EUR/USD likely to decline further on Greek risks and ECB QE.
• We recommend investors to stay long USD/CHF.
• We raise our target to 1.0600 and stop-loss to 0.9700.
Strategy
In FX Top Trades 2015, 3 December 2014, we recommended buying USD/CHF on monetary surprises and currency war. Since 16 December, the cross has increased nearly 5% as investors have re-established long USD trades following a temporary sell-off in the first half of December. The EUR sell-off has reaccelerated over the past few days amid increased concerns Greece might leave the euro. However, other factors are also weighing on EUR/USD such as declining oil prices and, not least, a worsening outlook for the Russian economy (see Flash Comment: Russian economy set to dive deep in 2015, 19 December). Markets are now pricing the risk of a Russian default at close to 1:2 on a five-year horizon and while a default is not our main scenario, the risk of a Russian default in itself is EUR negative given the unconstructive consequences of this for, notably, the European banking sector.
The decline in EUR/USD has materialised faster than we predicted and the cross has already fallen below our 6M target of 1.20. However, we expect the euro to decline further in the near term – especially against the USD – as the FX market will continue to price Greek and Russian risks and as oil prices continue to fall. Moreover, we expect the ECB to announce sovereign QE in Q1, probably at its next monetary policy meeting on 22 January (for more details see Flash Comment: We expect the ECB to announce government bond purchases in Q1) supporting our fundamental view of a lower EUR/USD driven by divergent monetary policy and the growth outlook.
The Swiss National Bank (SNB) cut the deposit rate to negative on 18 December, delivering on its promises to maintain its 1.20 floor against the EUR (see FX Strategy: Swiss National Bank introduces negative interest rates, 18 December). The negative interest will be effective as of 22 January 2015 and thus the impact on the CHF is still yet to be seen. We target EUR/CHF at 1.2200 in 6M but emphasise the risk is skewed towards our targets being reached earlier than we project. Hence, the CHF is still our preferred funding currency on monetary policy surprises and currency war.
Finally, we note that our short-term financial models have been able to explain the recent moves higher in USD/CHF and lower in EUR/USD given the development in oil prices and two-year swap spreads. Both crosses currently trade very close to the model’s fair value estimates of 1.0107 for USD/CHF and 1.1969 for EUR/USD suggesting that there is room for further extension of the current trends from a valuation point of view.
All in all, we recommend investors to stay long the USD against EUR currencies and we, therefore, lift our USD/CHF trade target to 1.06 (from 1.02) as well as we lift the stop to 0.97 (from 0.94).
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