Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
EURCHF - trading the downside prospects
John J. Hardy
Chief Macro Strategist
EURCHF is on the move, having now traded to a new low since early 2017 on an interesting possible driver - the US Treasury earlier this week having placed Switzerland back on its list of potential currency manipulators. The implication here is that to avoid negative further attention from US policymakers, the Swiss National Bank (SNB) will have to exercise restraint in intervening against further CHF strength as it has done regularly since the traumatic revaluation of the CHF after abandoning the CHF ceiling exactly five years ago today in 2015. Removing the assumption of a powerful central bank leaning against the currency's strength could mean a significant repricing of the franc higher, particularly given that over the last couple of years, Switzerland's economy has managed quite well and has rebuilt its current account surplus back toward a more historically normal 10% of GDP by late last year versus as low as sub-7% in early 2018. A current account surplus operates to constantly appreciate a currency unless capital flows compensate by leaving the country.
Trading a stronger CHF via EURCHF
Traders looking to trade CHF from the long side now potentially have an altered playing field if the SNB steps back here and the market psychology changes around that new fact. Traders looking for a re-rating of CHF higher might consider EURCHF short trades as a preferred vehicle as EURCHF is the dominant benchmark for the CHF exchange rate. As the chart below shows, we have just broken to the lowest levels since early 2017 as the US Treasury this week placed Switzerland on the currency manipulator watchlist. Shorting here with a stop north of 1.0850 and a target below 1.0500 or even close to parity for a stretch target is one strategy, as any move back above 1.0850 would suggest that for now, this move lower has been a false break.
A second way to trade EURCHF downside over the medium term - especially for a more considerable move and in a way that allows a trader to maintain a position regardless of short term volatility - is via a EURCHF put option, for example, a 3-month (April 15) 1.0500 put option, which costs 29 pips (spot reference 1.0760). A higher break-even price can be achieved with a higher strike price but at a higher premium cost (1.0600 for same expiry costs about 45 pips - so breakeven near 1.0555 vs. 1.0471 for the 1.0500 put option at 29 pips.)
Chart: EURCHF weekly
Risk warning
One potential offsetting factor for CHF bulls is the idea that the SNB has become something of a sovereign wealth fund in its own right as 20% of its enormous reserves (overall reserves worth well north of 100% of Swiss GDP and having rocketed some 800% from pre-financial crisis levels and the SNB's investments saw enormous positive gains in 2019). This fact could act as a further driver for CHF strength in the event late CHF strength since December of last year has also been driven by the virtual melt-up in equity markets. But it can also mean sudden downside risk if the mood for risk appetite changes drastically - i.e., CHF weakening sharply and EURCHF rising quickly.
Only advanced traders with a thorough knowledge of the risks of trading options should consider an options trade in the FX market - the chief factor to consider in this case that any long EURCHF put option trade as outlined above can result in a 100% loss of the amount risk on buying the option.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer