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The Pound-to-Swiss Franc exchange rate rose handsomely on Wednesday and remained one of the better performing Sterling pairs of 2021 but that hasn't stopped Credit Suisse and Natwest Markets from selling the Franc afresh and reiterating earlier buy recommendations for GBP/CHF.
Sterling advanced half a percent against the Swiss Franc in the mid-week session, taking its 2021 gain back above 5% and drawing a line beneath an early April sell-off which pulled GBP/CHF back beneath 1.30 and left it trading as low as 1.2615 on Monday this week.
Despite Wednesday’s plucky recovery the Pound-to-Franc rate remained -3.5% below its earlier peak barely a fortnight into a month in which Sterling has typically performed strongly and especially against low yielding “funding currency” candidates like Switzerland’s Franc.
This, the UK’s near-pole position in the vaccination race, enduring market expectations for a 2021 global economic recovery and a host of factors specific to the Switzerland are among the reasons why Credit Suisse and Natwest Markets suggested this week that clients continue to bet on higher GBP/CHF levels coming through the pipeline in the weeks and months ahead.
“So far in April, GBP has been one of the few major currencies to lag the USD. In our view, the key driver for this was more linked to a technical reversal of extended long positioning against funding currencies like JPY, CHF and EUR rather than a new, more negative assessment of GBP or the UK economy,” says Shahab Jalinoos, head of FX Strategy at Credit Suisse. “We still prefer to play pro-reflation views outside the USD in linked currencies like MXN or CAD and / or other covid outperformers such as GBP, funded out of EUR, CHF or JPY.”
Above: Pound-to-Swiss Franc exchange rate shown at daily intervals with Fibonacci retracements of 2020 fall.
Low yielding and low ‘beta’ currencies like the Franc and Euro were widely used to fund wagers on higher yielding currencies like the Canadian and Australian Dollars in recent months, as well as for sponsoring bets on others that were simply offering more attractive return prospects for other reasons.
Pound Sterling has been a case of the latter in light of the UK’s success in making the initial shot of a coronavirus vaccination available to all of the most vulnerable demographics in the opening months of the year, keeping the country on course to offer all of the UK population an initial shot before the end of July.
That has enabled supposedly non-essential parts of the economy to begin reopening this week and has given the country a shot at topping the major economy recovery rankings for 2021.
“The UK has most to gain from the end of lockdown restrictions as the level of UK GDP remains the most below trend of the developed economies. So the window for Sterling to recover is still open, at least until May’s Scottish national elections become a focus. Even then, we expect the UK government to push back forcefully on calls for a 2nd Independence Referendum. So for now, we keep our long Sterling positions vs the EUR and CHF,” says Paul Robson, head of G10 FX strategy for EMEA at Natwest Markets.
Above: GBP/CHF at weekly intervals with Fibonacci retracements of 2020 fall and 200-week moving-average in blue.
Having briefly topped the rankings of major currencies for 2021 in February and at various points through March the Pound was third placed for the year by Wednesday but is still billed as a buy relative to the Franc, which was second from bottom of the G10 table, at both Natwest Markets and Credit Suisse
The Swiss currency is also meanwhile being tipped lower against the U.S. Dollar and Euro by Capital Economics and Goldman Sachs, who’ve cited a mixture of domestic policy vulnerabilities and the Franc’s low yielding as well as low beta offering within the major currency pecking order as grounds for selling it.
“We expect the rotation trade to resume soon,” says Andrew Kenningham, chief European economist at Capital Economics. “Against this backdrop, we think that it will only be a matter of time before the Swiss franc resumes its gradual decline, which would be cheered by the SNB. We have pencilled in the currency falling to CHF 1.14 per euro by year-end, from CHF 1.10 at present.”
Kenningham says U.S. government bond yields are likely to set new highs in the months ahead and that it’s only a matter of time before the Franc takes to the slides again in what is also potentially bullish for Sterling.
Even more so than the Euro, Sterling has followed the 10-year U.S. yield in near-lockstep of late as can be seen from the below graphs.
Above: Pound-to-Swiss Franc exchange rate shown at daily intervals with 10-year U.S. government bond yield (orange).
Switzerland’s -0.75% cash rate is the lowest in the world, which has made some of the country’s assets particularly unattractive to investors, while the Swiss National Bank’s (SNB) resulting preference for using foreign exchange market interventions to protect or otherwise help attain its inflation target has made Swiss exchange rates an unproductive place to be for many traders.
SNB policymakers have been unable to sustainably meet their 2% inflation target for decades and in part because of a Franc that has been chronically overvalued by the market in a process that obstructs the bank from meeting its targets by providing an almost neverending subsidy of Swiss imports.
With expectations of a global recovery aside it’s these factors and the SNB’s resulting preference to combat adverse symptoms of currency overvaluation by direct market intervention that lead Kenningham and others to forecast sustained weakness ahead for the Swiss currency, even in the a scenario where Eurozone and broader European economic prospects are brightening.
Capital Economics forecasts envisage EUR/CHF ending the year around 1.14 with the Swiss Franc going on to rise “to close to parity with the US dollar,” making the EUR/CHF outcome a function of Swiss Franc losses, though the Goldman Sachs team sees a combination of softness in the Franc and strength in the Euro lifting the EUR/CHF rate to what would be its highest since 2018.
“We think the low inflation outlook in Sweden will constrain SEK appreciation, but its strong link to the European growth cycle could overshadow those concerns in a meaningful Euro upswing. On the other hand, we think CHF should resume its depreciation trend as European vaccinations accelerate even if the duration [bond] selloff is over,” says Michael Cahill, a G10 FX strategist at Goldman Sachs. “We hold our 12-month EUR/CHF forecast at 1.20.”
Above: Euro-to-Swiss Franc rate shown at weekly intervals alongside U.S. 10-year government bond yield (orange).