The Swiss franc (CHF) tends to gain in times of market stress, especially when the risks emanate from within Europe. The franc has finally turned positive for the year up 1% against the USD and up 6.5% against the euro (EUR) on the back of Italian political worries, emerging market volatility and global trade spats. But strong U.S. growth data and higher interest rates from the Federal Reserve has kept the CHF from increasing more significantly.
As expected, the Swiss National Bank (SNB) retained its ultra-loose monetary policy and kept its benchmark rate at -0.75%. The SNB will most likely start raising rates when the European Central Bank (ECB) also begins to normalise monetary policy; probably in September 2019. The SNB also stated it would intervene in the foreign exchange market when necessary.

In the short-term, we do not see any distinct spark for the CHF to weaken. Global trade tensions and EM issues will continue to keep the franc in demand as a safe-haven currency. Should there be any negative shocks relating to market uncertainty, we expect the CHF to appreciate sharply. Although in recent weeks Italian officials have said the government would respect EU rules on fiscal discipline, if the Italian government revisits the possibility of increasing its borrowing limits, we would expect the CHF to rise against the EUR further.
With the chance of a no-deal Brexit lower after news that the EU is prepared to make some concessions on the question of the Irish border, we see further gains in the British pound (GBP) against the CHF.
The export-orientated economy had a very strong first-half of the year with growth outpacing the euro area. However, we expect the second-half of this year and 2019 will slow initiated by U.S. tariffs on China and a stubbornly high CHF which may affect exports. As mentioned above, if political risks return again to Italy, if Brexit negotiations turn sour again, and if there is another emerging market sell-off, we see the CHF strengthening to 1.10 versus the euro which may force the SNB to intervene.

HXL Partners

CategoryForeign Exchange

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