We’ve recently updated our EURCHF and USDCHF forecasts, an outlook will be scheduled for sometime next week. Discussion of EUR and USD dynamics will also be outlined in their respective outlooks due imminently. In the meantime, below is a broad summary of the reasoning of why we have raised our EURCHF and simultaneously lowered our USDCHF calls across the 12-month horizon.
We predominantly forecast EURCHF and then triangulate out our USDCHF calls with the aid of our EURUSD forecasts.
We do this because the Swiss National Bank practically drew a line under the 1.05 level on EURCHF during the height of the global outbreak, emphasising to markets that the Swiss franc’s relative strength against its main trading partner’s currency is the central bank’s main focus.
This is a given seeing that trade is largely conducted via the EURCHF rate, meaning that it is the main input on the FX side to the central bank’s inflation forecasts. The Swiss Nationa Bank’s inflation target is CPI below 2%, with deflation as undesirable as inflation at or above 2%. Recently, the SNB’s President Thomas Jordan stated that currency intervention is an “essential” policy tool, seeing as a strong franc leads to the Swiss economy importing deflationary conditions.
Our EURCHF forecasts continue to show a rall in the cross over the 12-month horizon, but the latest set of forecasts highlight our expectations of an earlier rally in the cross compared to what was previously expected. This is broadly driven by our EURUSD forecasts being upgraded due to growth differentials, which we see as the main driver in FX markets at present. The euro-area is already showing the early signs of a strong economic recovery due to effective containment of the virus and a broad re-opening of the economy. While the threats of localised spikes, and therefore the imposition of stricter but more targeted containment measures, are likely, we see this as becoming the global norm in lieu of a vaccine. Thus, this poses only a muted downside risk to the EUR outlook. Additionally, relative to recent history, the quick consensus built by EU leaders over the recovery fund highlights the political will to drag the eurozone economy from the depths of the Q2 recession.
While the €750bn is a small fiscal injection in the grand scheme of things, we argue that the signalling effect was greater.
With the US economy still embattled with containing their domestic outbreak, our latest dollar outlook outlines that the US economy is likely to lag the eurozone rebound, leading to a rally in EURUSD. This positive sentiment around the single currency due to the economic rebound has filtered into the region as a whole, boosting sentiment around euro-periphery currencies where domestic outbreaks were also well managed.
While CHF holds the role of a global haven currency, arguably its haven attributes are stronger when regarding regional risk.
As the risk environment within Europe becomes more sanguine, we envisage the franc will also fall victim to improved regional sentiment. However, with the SNB buffering market forces at the 1.05 level throughout the crisis, the level of haven flows set to unwind as the economic environment improves is arguably less for CHF relative to other safe havens such as JPY. While we see the Swiss franc depreciating against the euro, versus the dollar is another question altogether. Our latest forecasts factor in broad USD weakness as the US economy lags the global economic recovery, meaning the limited sell-off in the Swiss franc due to the unwinding of haven flows will see it climb higher against the dollar.
Latest CHF forecasts supplied to Reuters:
*Previous forecasts are included in parentheses
Lasting deflationary effects is why the SNB buffers a strong franc, as evidenced by sight deposit data – a EURCHF rally will be warmly welcomed by the central bank
Author: Simon Harvey, FX Market Analyst