- GBP/CHF has scope for 1.35: USD/CHF could see 0.97.
- As relative growth outlooks drive yeld, policy divergences.
- Vaccination lag constrains Swiss, EU economic rebounds.
- As U.S. rollout picks up; India & GB factories secure UK's.
- Goldman, Barclays, BofA & Natwest tip GBP/CHF gains.
Image © Swiss National Bank. Violinist of the Tonhale Orchestra pictured at 2007 SNB centenary celebration.
- GBP/CHF spot rate at time of writing: 1.2818
- Bank transfer rate (indicative guide): 1.2432-1.2522
- FX specialist providers (indicative guide): 1.2626.1.2728
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The Pound-to-Swiss Franc exchange rate was lower on Wednesday but remained the best performer of the Sterling currency complex for 2021 and has been increasingly tipped for further gains later in the year including by Goldman Sachs, Barclays, BofA Global Research and Natwest Markets.
Pound Sterling was under pressure as risk currencies were swept up by a wave of losses for riskier currencies that began on Tuesday, but GBP/CHF was still carrying a 6% gain for 2021 and could have scope to add as much as another five percent to that later this year some forecasts suggest.
Sterling and European currencies including the Swiss Franc have been penalised amid hallmarks of risk aversion in other markets and as the continent's vaccine procurement problems continue to dominate regional news agenda.
Difficulties procuring enough vaccines have set recoveries back by months and driven Brussels to protectionism over supplies of the Astrazeneca vaccine, with the bloc's officials openly pushing to restrict vaccine exports to Britain.
“The vast majority of the 100 million doses the UK will receive will be made either in the UK or in India,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets. “100 million doses would cover the entire adult population for a two-dose regimen.”
Europe’s vaccine lag is more problematic than those elsewhere because it’s hampering recoveries in places that were already susceptible to underperformance before the crisis and is widening gap between growth expectations for the continent and the likes of the U.S. and UK.
Source: Goldman Sachs Global Investment Research.
The White House’s ramped up vaccine programme and Washington’s big spending has bolstered expectations for the U.S. recovery while expectations for European growth are stagnating, which is accentuating the already comparatively low yield characteristics of continental currencies for investors who’re contemplating the year ahead.
“We think this divergence will be an important factor in G10 FX this year,” says Michael Cahill, a G10 FX strategist at Goldman Sachs. “The expected timing of policy normalization should support CAD and NOL (both components of our USD short basket) while it may eventually hold back GBP."
Goldman Sachs has a bearish view on the Dollar and forecasts USD/CHF to remain around 0.93 this quarter before dipping to 0.92 in June.
However, the bank advocated back in February that clients buy GBP/CHF around 1.24 in response to the UK's vaccine success and is targeting a move up to 1.33, which would be Sterling’s highest since late 2019.
Cahill and the Goldman team do however warn that Sterling could be unlikely to benefit for long from diverging investor expectations for central bank interest rates and government bond yields, as they suspect investors will be disappointed by a Bank of England (BoE) which elects to reduce its footprint in the bond market before lifting rates.
“We also think the BoE will remain on hold throughout 2021, maintaining its accommodative stance, but the BoE is not likely to be concerned by a strengthening GBP, in our view,” says Marvin Barth, head of FX strategy at Barclays. “USD remains king of the beasts but its valuation limits its ability to rise; commodity G10 and GBP lead in growth and the EUR lags; JPY and CHF are likely to underperform as global growth accelerates."
Above: Pound-to-Franc rate shown at daily intervals with USD/CHF (yellow).
Barclays forecasts the Sterling-Swiss exchange rate will rise to 1.35 over the next few quarters, which would be its highest since 2018, and is looking for USD/CHF to reach a multi-year high of 0.97 in amid weakness in the Franc as well as strength in the Dollar and Sterling.
Hopes of faster economic recoveries are lifting bond yields and drawing investors’ bids for the Dollar and Pound although, and unlike the European Central Bank (ECB), both the Federal Reserve (Fed) and Bank of England have both indicated that they're unfazed by recent increases in borrowing costs.
The ECB took action this month to prevent yields rising in some parts of Europe, while the Swiss National Bank (SNB) will have an opportunity on Thursday to give its response to both recent moves in the bond markets as well as a deterioration of the Swiss coronavirus picture.
“The weakening in CHF has been a broad based market dynamic that has ended up as a higher rates environment and encapsulates the rally in commodities, stocks, in commodities, credit and more crucially, the pricing out of global macro risk premium,” says Kamal Sharma, a strategist at BofA Global Research. “GBP/CHF is probably the cleanest expression of the rates story.”
Sharma has recommended that clients buy the Norwegian Krone against the Swiss Franc but also sees the Sterling-Swiss exchange rate benefiting from the impact that economic divergence has on the bond markets, especially when British and Norwegian yield prospects are stood next to those of Switzerland.
Source: BofA Global Research.
Sharma's colleague Vadim Iaralov, a quantitative strategist, bought USD/CHF around 0.9240 as his top trade this week citing quantitative models that measure stock market flows as well the comparative yield offerings of different currencies for thinking investor appetite for Swiss assets is deteriorating.
“We see the UK economy as still on track for a mini consumer boom from Q2 to Q4 and the UK’s vaccination programme continues to stand out relative to the EU. We thus stay short EUR/GBP and long GBP/CHF,” says Paul Robson, head of G10 FX strategy EMEA at Natwest Markets, who said in early March.
Natwest Markets has tipped GBP/CHF to rally as far as 1.32 over the coming months as Sterling rises against many currencies while Dollar strength and weakness in the Franc drive USD/CHF higher. The bank is a seller of the Franc and Japanese Yen relative to Dollar.
USD/CHF and GBP/CHF would be among the most reactive to a ‘dovish’ surprise from the SNB at 08:30 London time on Thursday where the bar for deterring investors further away from the Franc is low in light of other analysts’ expectation for Swiss policymakers to sound a more optimistic tone this week.
Some suggested it would be heartened by earlier calm in markets and recent falls in the Franc, but this was mostly before last Friday when the Federal Council suspended plans for a further reopening of the economy until at least mid-April ,citing infection numbers and inadequate vaccination progress.
“There are few doubts that the SNB will reinforce its dovish credentials, says Jane Foley, head of FX strategy at Rabobank. “While there is scope for the CHF to soften on the back of a dovish position from the SNB, the currency’s sensitivity to safe haven flows means that it is likely to continue to take the lead from broader risk sentiment."
Above: Pound-to-Franc rate shown at weekly intervals with USD/CHF (yellow).