- GBP/CHF has recovered since March
- UBS see GBP/CHF higher by year-end
- JP Morgan and Soc Gen see it lower
- UK economic recovery has recently overtaken Switzerland's
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- GBP/CHF spot at time of writing:
- Bank transfer rates (indicative guide):
- FX specialist rates (indicative guide):
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The Pound will likely extend a multi-week advance against the Swiss franc over the remainder of 2020, provided the economic normalisation underway in the UK and across the global economy remains intact.
The Pound-to-Franc exchange rate has risen from a low of 1.1133 reached during the height of the coronacrisis market meltdown, a move that testified to the Franc's 'Uber-safe haven' status in times of financial market upheaval. However, with markets stabilising since mid-March the Pound has recovered in stops and starts to ultimately reach current levels around 1.1916.
The fate of the recovery ultimately resides with how global investors behave over coming weeks and months, with a basic rule of thumb to apply being that should the stock market and commodity market recovery extend, GBP/CHF will also likely go higher.
"We assume that by September much more of the economy will be functioning than today, and that investment plans will become more concrete. In such a normalising world, we would expect the pound to gain relative to the Swiss franc," says Thomas Flury, a Strategist at UBS, the Swiss-based multi-national bank.
UBS expect the Swiss National Bank to run down its intervention in the foreign exchange market as market forces will continue to aid a depreciation in the currency which had seen significant appreciation in early 2020.
"It has been very strong in recent weeks, and unwinding these positions is likely to benefit pro-growth currencies like the GBP," says Flury who expects the Pound-to-Franc exchange rate to trade around 1.22 by end-2020. "The equilibrium three years ahead remains higher, at 1.35, and interest rate differentials between the UK and Switzerland are also supporting the GBP."
How Sterling behaves against the Franc and other foreign currencies over coming months also depends greatly on how the UK economy recovers relative to the Swiss economy. Indeed, we noted here that one reason for a steady decline in the value of GBP/EUR is the more robust economic recovery underway in the Eurozone relative to the UK.
Should the same apply to UK-Swiss dynamics then the GBP/CHF exchange rate could find itself declining in value into 2021.
"We’re staying short GBP/CHF, which has spent the month of August in a small range so far. After all, this time last year the market thought the UK would grow as fast as Switzerland in 20/21. Now it’s clear the Swiss have tackled the pandemic much better than us," says Kit Juckes, Chief Global FX Strategist at Société Générale.
Foreign exchange strategists at JP Morgan - the Wall Street investment bank - are looking for GBP/CHF weakness over coming weeks on expectations that the UK economy will underperform European peers, while a 'hard' EU-UK Brexit trade deal will only add to the underperformance of both the economy and currency.
"A key decision for GBP will be whether the Chancellor extends the furlough scheme that is currently due to wind down in October. While facing greater political pressure to extend, fiscal reality may well prevent this and hence expose GBP to a pronounced rise in unemployment that clouds the recovery prospects by comparison with the many countries in Europe whose job-support schemes run to year-end or 2021," says Paul Meggyesi, Head of FX Research at JP Morgan in London.
Betting against Sterling on expectations for UK economic underperformance relative to Switzerland does however come with its risks: while the UK was hard-hit by lockdowns, it might also have the ability to recover fastest now that lockdown has been lifted.
Indeed, the OECD gathers timely economic data from the world's largest economies and compiles it into its Composite Leading Indicator which gives a view of major turning points in an economic cycle and allows us to see how economies are performing relative to each other.
If we compare the Swiss and UK recoveries we can see that quite recently the UK economic rebound has overtaken that of Switzerland's:
Image courtesy of the OECD
Should this data be crystallised in the official statistics due for release over coming weeks then we could see markets reappraise GBP/CHF accordingly, which could promote some appreciation.
However, for Meggyesi there are a number of factors in play when considering Sterling, one being the Bank of England and whether or not it will cut interest rates to zero or below.
Meggyesi says while the Bank of England might have indicated in August it is not ready to cut interest rates to 0% or below in the near-future, such an outcome remains a distinct possibility. The rule of thumb in foreign exchange is that when a central bank cuts interest rates or boosts quantitative easing the currency it issues falls in value,
The Bank of England might be sitting tight for now, but economists argue the Bank might have to rethink policy should unemployment spike in October and November when the Government ends its payroll support scheme.
And then there is Brexit. "Brexit talks have paused without any real evidence of progress having been made. The prospect of a relatively hard Brexit (no deal or a bare-bones trade deal) is still something that will independently retard the post-COVID recovery in the UK, and hence, in our view, is a reason to stick with a strategic short in GBP," says Meggyesi.
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