Bets on a European recovery are accelerating at the expense of the Swiss franc.
(Bloomberg) —
Bets on a European recovery are accelerating at the expense of the Swiss franc.
With energy prices falling, China moving to reopen its economy and signs growing that the Federal Reserve may slow its rate hikes, the outlook for the euro-area is improving. And with it, demand for haven currencies such as the franc — traditionally used to ride out market turbulence — is fading.
The optimistic shift has helped drive the euro-franc cross past parity for the first time in six months. It’s a turnaround from last year when the franc soared versus a struggling euro, as inflation and recession fears drove investors to one of the world’s most popular currency havens.
Another sign of how quickly global risk sentiment has roared back is the spread between German and Italian bond yields, said Kiran Kowshik, an FX strategist at Lombard Odier in Geneva. It’s narrowing even as the European Central Bank signals borrowing costs need to rise significantly further.
“That’s an environment which goes against a bearish euro-Swiss franc stance on a tactical basis,” he said.
The franc’s slide to below parity with the euro has raised speculation that the Swiss National Bank may be more comfortable with a weaker currency, amid expectations inflation has peaked in the export-driven economy. Despite its performance versus the euro, the Swiss currency is also up by around 8% against the dollar since early November.
That’s “delivering some of the stronger nominal franc that the SNB has been seeking, so there is less pressure for them to drive EUR/CHF lower,” said Chris Turner, head of FX strategy at ING Bank NV in London.
Interest rates have moved in favor of the euro, with the ECB’s terminal rate likely topping that of the Swiss National Bank by nearly 200 basis points this year, according to Wells Fargo strategists.
Ongoing, aggressive tightening by the ECB could push the pair to 1.05 in the coming months, said Sven Schubert, senior investment strategist at Vontobel in Zurich. The rate could climb as high as 1.10 “in a very bullish market environment, in which policy tightening continues without triggering a recession.”
Limited Depreciation
Options pricing supports a move higher in the euro versus the franc, with risk reversals surging this week to their highest levels since February amid a jump in demand to protect against a rise in the single currency.
Still, most strategists and portfolio managers agree that economic fundamentals in Switzerland, including its relatively stronger deflationary pressures and the tendency of investors to resort to francs when demand for risky assets cools, means that any depreciation in the Swiss currency will be limited over the longer term.
If risks to the euro zone outlook pick up again, the franc should recover once central banks send stronger signals about the need for tighter financial conditions, said Martin Lenz, senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt.
Last week’s move “might be something that the SNB would tolerate, but if we go to 1.02 or higher, the SNB would not be happy with that,” he added.
This Week
- Traders will see a raft of data from the UK, which may determine the course of the Bank of England’s monetary policy, including inflation data for December and labor market figures
- Bank of England Governor Andrew Bailey will be testifying to lawmakers on Monday, while several European Central Bank officials will speak at the World Economic Forum including Christine Lagarde, Klaas Knot and Francois Villeroy De Galhau. This week will also see the account of the ECB’s last rate decision in December published
- Euro-area sovereign issuance could reach close to €40b, according to Commerzbank AG strategists, adding that Spain, Cyprus and Greece could be candidates for syndications. Scheduled auctions come from countries including the UK, Germany, Spain and France
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