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By acting as a pioneer, the SNB turned the franc into an underdog. As the key rate decreases further, USDCHF and EURCHF uptrends will intensify. Let’s discuss this topic and make up a trading plan.
Quarterly Swiss franc fundamental forecast
SNB officials decided to take the initiative into their own hands. They became the first among the G10 to lower the key rate from 1.75% to 1.5%. As a result, the principle “whoever starts, loses” worked out. USDCHF soared to 4-month highs, while EURCHF reached its highest since early July.
The SNB’s decision was extremely unexpected for financial markets. Only 5 out of 23 Bloomberg experts, including JP Morgan and State Street, predicted the start of monetary easing in March. The interest rate swap market gave a 39% probability of the start of monetary expansion, while reversal risks for the franc against the euro reached their lowest level in two years and against the US dollar in a year.
The CHF collapse could have been even more serious if not for the bearish positions. Hedge funds were negative about Swissy even before the SNB meeting in March.
Dynamics of EURCHF and CFTC leveraged funds net CHF positions
Source: Bloomberg.
In fact, the SNB was the first of the world’s major central banks to declare victory over inflation. According to Thomas Jordan, this was due to progress in combating consumer prices, which have long been within the target range of 0-2%. At the same time, the reduction of the central bank’s forecasts for CPI to 1.4% in 2024, 1.2% in 2025 and 1.1% in 2026 suggests that rates will not remain at the current level for a long time. Danske Bank forecasts their decline at each of the three remaining SNB meetings in 2024. As a result, borrowing costs will drop to 0.75%, which makes further purchases of USDCHF and EURCHF relevant.
Inflation dynamics and forecasts in Switzerland by SNB
Source: Bloomberg.
How justified is the decision of SNB officials? They did not wait for the Fed and the ECB and were the first to take a step along the path of monetary expansion. Moreover, Thomas Jordan cited the franc strengthening over the past year as one of the reasons for the verdict on reducing the key rate.
In my opinion, SNB did not take matters to the extreme. Other central banks are worried about the negative impact of real rates on their own economies, fearing they will trigger a recession. In Switzerland, real rates turned out to be positive only for a while, and it is unlikely that there will be a decline there.
Dynamics of the SNB rate and inflation in Switzerland
Source: Bloomberg.
Wells Fargo and Monex Europe say the current CHF rate is still too high, while HSBC and Rabobank expect it to fall further. Goldman Sachs has revised its forecasts for EURCHF. Bank officials expect the pair to rise to 0.99 within 12 months.
Quarterly USDCHF trading plan
In my opinion, by opening Pandora’s box, the SNB drowned the franc. The cycle will soon continue, pushing USDCHF to 0.91 and 0.92 within one and three months, respectively. After reaching the previous targets of 0.891 and 0.9015, use corrections to enter purchases.
Price chart of USDCHF in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
