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The fact that the Swiss franc has become appealing to hedge funds again may seem unexpected. However, speculators are closing their positions ahead of US inflation data and the ECB meeting. Let’s discuss this topic and make up a trading plan for USDCHF and EURCHF.
Weekly Swiss franc fundamental forecast
Considering the US dollar’s reluctance to strengthen in favorable market conditions, hedge funds’ turn to the Swiss franc is not surprising. According to Credit Agricole, many bearish factors are already priced in the Swiss currency’s quotes, and the ECB’s unexpected dovish stance may trigger a sharp decline in the EURCHF pair. In such an environment, the migration of speculators from this year’s highest number of net short positions to net long ones on the Swiss franc seems natural.
Hedge funds’ positions on the franc
Source: Bloomberg.
Asset managers are much less likely to abandon their plans than hedge funds, so their total net shorts on the franc are still at their highest level since late 2019. The USDCHF rally is based on investor confidence that the National Bank will continue its monetary easing cycle. In addition, the market believes that the franc will replace the yen as the primary funding currency.
In Switzerland, inflation slowed to 1% in March, below the 1.3% forecast. It is a mystery why the franc’s underdog position in the currency race among the top ten currencies is not contributing to the CPI stabilization. For the SNB, the downward momentum of the indicator implies the need for further rate cuts.
Swiss inflation rate change
Source: Bloomberg.
In its forecasts, the Swiss regulator sees some acceleration in inflation in Q2 and Q3. If inflation continues to cool, the SNB could become more aggressive in its monetary expansion. We are talking about a 25bp cut in the key rate for all three remaining meetings in 2024.
If US consumer prices continue to accelerate, derivatives will reduce the implied size of the Fed’s monetary easing this year to 35-50 bps from 60bps. This may trigger a monetary policy divergence and push the USDCHF pair significantly higher.
Meanwhile, major banks and investment firms are starting to talk about a selling CHFJPY strategy as the franc may replace the yen as the main funding currency in carry trade operations. For example, Citigroup predicts that the pair may slump to 160. The SNB will likely cut its key rate to 1% or less in 2024, while the Bank of Japan is likely to increase its overnight rate to 0.5% in 2025. The divergence in monetary policies is a reason to sell the Swiss franc against the Japanese yen.
The franc can only strengthen against the euro if the ECB surprises with its dovish turn. The futures market is expecting the start of monetary expansion in the eurozone in June. However, ECB head Christine Lagarde and her colleagues may postpone this decision to April 11, which would be a real blow to EURCHF bulls.
Weekly USDCHF and EURCHF trading plan
If US inflation accelerates, you may open long trades on USDCHF with a target of 0.92. At the same time, selling EURCHF is possible with the targets at 0.976 and 0.972 if the ECB cuts the rate.
Price chart of USDCHF in real time mode
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