A view on USD/CHF, a tale of recovering US yields
So far this year we have seen an initial extension of USD weakness and a sharp dip in equities after an initial continuation of strength. The dip in equities has been triggered by a rise in US yields as markets have priced in a stronger US economy and more rapid Fed tightening. The rise in US yields has also 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. 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.
The increasing attraction of US yields is expected to halt the recent USD downtrend and all a USD recovery in the next few months, even if in the longer run the USD should be expected to resume a move back towards longer term fair value.
While the USD remains a little expensive relative to long term fair value against many currencies, the EUR and JPY included, it remains at 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. A stronger USD will also favour European equities, which 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.
Buy USDCHF at 09325 or below looking for a recovery to 100 Stop at 09070
Disclosure:
I have no positions in any of the securities referenced in the contribution
I do not use any non-public, material information in this contribution
To the best of my knowledge, the views expressed in this contribution comply with UK law
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This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.
Rafael S. Lajeunesse
