Forex Investment and Currency Trading

CHF has gained handsomely on the worries over global growth, tightening credit conditions and the steady deterioration in risk appetite. FX models say relative to the move in risk sentiment (captured by option vol, credit spreads and equities), EUR/CHF is now broadly fairly valued.
Evidence of global economic recoupling will see the CHF appreciate further against the USD and other major currencies (the JPY likely the main exception). But European contagion will happen only slowly. Euroland has been hit by a supply-side shock that burns more slowly than the demand shock that’s hit the US economy. Transmission from slower US growth to Europe may also be slower than in previous cycles because trade patterns have changed. But it will come.

While the CHF will be a winner during major periods of risk aversion, relative yields will remain an important driver, particularly against the EUR. Swiss National Bank has consistently warned that CHF weakness would put upward pressure on consumer prices and that it wouldn’t hesitate to raise rates if currency weakness became an issue. SNB may also have to acknowledge that the opposite is true. In reality, the SNB will only cut rates if CHF strength starts to threaten medium-term price stability. Domestic inflation is low, so slower import inflation driven by CHF strength would be important.

Leading indicators, such as the KoF survey still point to stable/modestly slowing growth. With resource utilization high, inflation will be slow to fall which argues for a stable policy rate. Eurozone data have been largely impervious to slower US and UK growth but eventual ECB rate cuts will out pace SNB cuts over the coming year. A narrowing in rate spreads will be CHF supportive against the EUR. The CHF will also gain further against the USD and GBP through H1:08 as the Fed and BoE continue to cut.

The biggest risk to a strong CHF central scenario is decoupling and a risk environment noticeably better than the one market currently envisage. CHF would be the most vulnerable against the EUR and Antipodeans.