SWISS FRANC FUNDAMENTAL FORECAST: BEARISH
Swiss Franc has been underperforming despite Stock Exchange volatility
Prospects of dovish SNB policy in the long run leaves CHF vulnerable
Still, risk aversion will trim the Franc's downward trajectory near-term
The Swiss Franc was unable to capitalize on recent jitters in global stock markets and it may continue to underperform ahead. CHF tends to do well when market volatility is about the rise and vice versa as a result of its own anti-risk features, particularly when comparing against other currencies in Europe. So despite several wobbliness in stocks as of late, especially in the tech sector, what might clarify its underwhelming functionality?
Before diving into that, the Swiss National Bank (SNB) may actually welcome further declines in CHF, especially with the upcoming financial policy statement coming up on March 25th. Switzerland's export-oriented economy means a powerful community money can bring with it deflationary forces. The SNB has been struggling to deliver up CPI to its 2% price goal for years, intervening in foreign exchange markets to keep deflation at bay.
Since the coronavirus ravaged global financial markets last year, the central bank had to aggressively step up efforts to prevent its anti-risk money from appreciating too quickly. But since then, the SNB was letting off the gas pedal, particularly given the currency's recent depreciation.
SWISS NATIONAL BANK TOTAL SIGHT DEPOSITS
The rollout of this coronavirus vaccine across the world and massive monetary stimulus from the United States are bringing with these prospects of reflation. This may be observed by taking a look at longer-term Treasury rates, with the 10-year up nearly 240 percent from August's bottom. Rising government bond yields also have been observed in Switzerland, though the whole yield curve (in the front-end into the 50-year speed ) still remains negative.
In reality, the SNB retains the title as the central bank using the lowest benchmark lending rate, coming in at -0.75%. Vice President Fritz Zurbruegg noted that the nation's deeply negative policy rate and intervention will continue to be mandatory. Despite inflation stakes rising in areas of the world and markets beginning to price in early phases of tapering in the United States as economic statistics outperforms, the SNB may stay low in the long term.
You are able to observe these expectations by looking at 10-year bond yield spreads between the USA and Switzerland. On the chart below, the Swiss Franc has been depreciating as returns on fixed income rise externally, making the CHF comparatively less attractive compared to its major counterparts. Meanwhile, prospects of low rates will likely mean the Franc continues to remain a dominant funding money from the carry trade.
If asked about bonds, Mr Powell may continue to reiterate similar commentary about them. So while the CHF might be exposed from a yield standpoint, still it should be said that risk aversion may impede its depreciation seen as of late.
