USDCHF correction due

The rise in US yields has been the key feature of the year so far for currencies and equities as well as bonds. While the USD initially weakened at the beginning of the year, continuing the downtrend seen at the end of 2017, rising US yields have halted the downtrend as well as triggering a sharp equity correction. Rising US yields have led to a widening of yield spreads with other major currencies, with the key bund/T-note spread approaching the highs seen at the end of 2016.

I would expect the rising US yield story to continue to provide support for the USD in the coming months. While the Fed is set to continue tightening, the ECB is likely to remain on hold for at least the rest of this year and probably well into 2019, as will the BoJ and the SNB. For a currency play, USD/CHF looks like the best vehicle to play a USD recovery.

While the USD remains a little expensive relative to long term fair value against many currencies, the EUR and JPY included, it remains nbsp at comparatively high levels against the CHF. Furthermore, the CHF is a good tactical sell because EUR/CHF will tend to rise as risk premia in Europe decline, as they will tend to in a stronger global growth environment. nbsp While there is a risk to equities from rising US yields, the risk nbsp is greater to US equities than European, given that European yields are likely to rise much less, at least in the next few months, so the risk appetite impact of a lower equity market should not provide too much benefit to the CHF via traditional safe haven flows. European equities in any case look good value internationally with the EuroStoxx 50 broadly in the centre of its range of the last few years. If US yields rise further, the USD should benefit more, while if the rise halts, equities should perform better, boosting EUR/CHF.

We are also in a good technical area to buy USD/CHF after the extended dip in recent months. From a value perspective note that USD/CHF Purchasing Power Parity currently stands around 30% above current levels, which is around the average for history, so although the USD is a little expensive against other currencies, it is good value against the CHF given its historically attractive carry. The positive carry is another attractive aspect of the trade.

The risk of another sharp CHF rally as seen in 2015 is low, given the currency is no longer being held back by the SNB, who remain keen to see it weaker and are even less likely than the ECB to tighten policy any time soon. nbsp nbsp

Buy USD/CHF at 0.9325 or below, looking for a recovery to 1.00. Stop at 0.9070