UBS has published a report analyzing the impact of the Swiss National Bank’s (SNB) surprise rate cut in March on foreign exchange markets. The SNB’s early actions, ahead of other major central banks, triggered a flurry of carry trades, leading to a significant weakening of the Swiss franc against major currencies, especially the euro. The yield difference between the Swiss franc and the euro, now more than 200 basis points, has contributed to the pair’s gains.
Market futures suggest a significant increase in short positions in the Swiss franc, indicating risks of a depreciation in the exchange rate. However, UBS expects these short positions will likely cap USDCHF’s upside at 0.92.
Switzerland’s economic growth rate is forecast to remain around 1.5%, while US growth is expected to slow from 2.4% this year to 1.4% next year. The SNB is expected to continue cutting rates by 50 basis points by September, keeping rates at 1% over the forecast horizon.
UBS also forecasts that the Federal Reserve will begin cutting rates in September, by a total of 100 basis points by June 2025. This policy shift is expected to keep the Swiss franc under pressure until the Fed cuts rates later this year.
The report notes that the outcome of the US elections, whether Biden wins or Trump wins, is unlikely to have a significant impact on the US dollar, since many of Trump’s policies have already been adopted by the Democratic leadership.
The report further discusses how geopolitical tensions surrounding the US elections could impact currencies. Rising tensions could lead to inflation for the Swiss franc, while increased war rhetoric traditionally benefits the US dollar but has less impact on the USDCHF.
In terms of investment implications, UBS expects USDCHF to remain above 0.90 in the coming months, with potential declines as the Fed begins to cut rates. The firm identifies support for USDCHF around 0.85 and resistance around 0.92.
The report concludes that global economic growth could support the euro and, to some extent, the Swiss franc against the US dollar.
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