February 12, 2024

USD/CHF Outlook

The blog post covers recent shifts in USD/CHF trading, focusing on Switzerland's increased foreign reserves and potential SNB interventions. It discusses upcoming data releases affecting SNB interest rate decisions and how expectations for rate cuts by the Fed and ECB are impacting currencies like the CHF and JPY. Additionally, it touches on factors driving USD/JPY movements and changes in Japanese household investments.

The initial recommendation for trading USD/CHF was made to capitalize on the expected further upside for the USD in the short term, along with concerns from the Swiss National Bank (SNB) regarding the strength of the CHF at the end of the previous year. Recent data on Switzerland's foreign exchange reserves indicates a second consecutive monthly increase in January, reaching CHF662 billion, surpassing the low in November at CHF642 billion.

This marks the most significant two-month increase in foreign currency reserves since January 2022, suggesting that the SNB may have resumed direct intervention to weaken the CHF. This action follows the SNB's indication at its December policy meeting that it was no longer prioritizing foreign currency sales, having gained confidence that inflation would remain within its target range over the forecast horizon.

Looking ahead, the release of Switzerland's latest sight deposit data and CPI report for January will be important in evaluating the SNB's ongoing response to CHF strength. The Swiss interest rate market currently expects around 8 basis points of rate cuts by the SNB at its next policy meeting on March 21st and 28 basis points by the following meeting in June. If the CPI reading for the upcoming week falls below expectations, it could fuel speculation that the SNB will cut rates before the ECB meeting in March to further weaken the CHF.

Additionally, the low-yielding G10 currencies such as the CHF and JPY have also been affected by reduced expectations for rate cuts by the Fed and ECB. Recent economic data releases from the US and the eurozone have surprised to the upside at the beginning of this year. The relatively stronger performance of the US economy has renewed interest in long USD positions to benefit from US exceptionalism.

This has led to an increase in 2-year yields in the US and the eurozone by around 35bps and 30bps, respectively, from last month's lows. The hawkish repricing of expectations for a later start to and a shallower Fed rate cut cycle, based on a more resilient US economy, has been an important driver behind USD/JPY moving back towards last year's peak, just above the 150.00-level.

Despite recent communication from the Bank of Japan (BoJ) indicating preparations for an exit from negative rates since their last policy meeting in January, the timing of the first rate hike from the BoJ is still seen as more likely in April, though an earlier start in March cannot be ruled out. Another domestic factor contributing to renewed JPY weakness at the start of this year has been changes to the NISA tax-free savings accounts for households in Japan. Data released by the Ministry of Finance (MoF) this week revealed record demand for foreign equities by Japanese Investment Trusts in January, totaling JPY1.29 trillion.

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