Graphic: Swiss franc moves higher as U.S. Treasury report looms

St Galler Kantonalbank AG

28/10/2021 07:00

(Repeats story published on Wednesday with no changes to text)
    By Saikat Chatterjee and John Revill
    LONDON/ZURICH, Oct 27 (Reuters) - The Swiss franc, at
11-month highs against the euro, looks set for further gains on
back of higher inflation, hedge-fund positioning against market
turbulence and above all, a central bank which has become far
more tolerant of currency strength.
    The rise comes at an opportune time, just as the U.S.
Treasury prepares to issue its report on trading partners'
currency policies. Its April report deemed Switzerland to meet
the criteria to be named a currency manipulator, though it
stopped short of labelling it so.  urn:newsml:reuters.com:*:nL1N2M9129
    Since then, the Swiss National Bank, has sharply scaled back
interventions to tamp down the franc, even though it stands 4.6%
firmer than the 18-month lows hit in early-2021 versus the euro
 EURCHF=EBS . 
    Against the dollar it is near six-week highs, having firmed
3% since early-April.  
    Stephen Gallo, head of European FX strategy at BMO, says
many speculators remain "long" Swiss franc against the dollar
and euro "because they're concerned there will be some kind of a
flare up in markets and as a result, they are buying upward
exposure on the Swiss franc."
    But while the franc, alongside other safe-haven assets such
as gold and the yen, is monitored as a barometer of global
markets' mood, most analysts reckon franc strength is no longer
solely down to safety-seeking flows. [ urn:newsml:reuters.com:*:nL8N2PR17V]
    Below are five charts showing what's driving franc gains:
    
    1/INTERVENTIONS
    Despite the franc's 2.6% rise versus the euro since
mid-September, the SNB has largely steered clear of
interventions, stepping in recently for the first time in six
weeks.
    Thomas Stucki, chief investment officer at St Galler
Kantonalbank and the former head of asset management at the SNB,
reckons policymakers will retain their hands-off approach. 
    One reason is that expectations of interest rate rises from
other central banks, such as the Fed and the Bank of England may
limit franc upward pressure.
    "The franc's level is currently not a problem for the SNB
and though the franc is strong, we don't have deflationary
pressure," he said.
    Swiss inflation is running at a two-year high of 0.94% in
September.        
    

    
    2/DISAPPEARING DIFFERENTIALS
    Franc appreciation bets are also being fanned by the
expectation that higher inflation could elicit an interest rate
rise from the SNB, said GianLuigi Mandruzatto, an economist at
EFG Bank.    
    Unlike peers such as the European Central Bank and the Fed,
the SNB has not tweaked its policy framework to introduce a
higher inflation tolerance threshold. That implies it would need
to act if inflation accelerates above its price stability target
– defined as just below 2%.  urn:newsml:reuters.com:*:nL8N2OP46Z
    Money markets are pricing a 15 basis-point rate rise from
the SNB by end-2022, more than what is expected from the ECB. At
-0.75% Swiss rates are the lowest in the world.
    "By mid to end-2025, markets expect the current differential
will be inverted, with interest rates 40 basis points higher in
Switzerland than in the eurozone," Mandruzatto said.
    "This 65 basis point differential is enormous in a world
where interest rates are 0.01%. People will be buying into the
franc now to benefit from this trend in the future."
        
    
        
    3/ TRADE WEIGHTED FRANC
    Against trade partners' currencies, the franc no longer
looks as overvalued as before versus long-term averages. 
    ING strategists believe while Switzerland ticks the boxes
for being named as a currency manipulator by the Treasury, it
may again dodge being labelled so. 
    The criteria include having a trade and current account
surplus against the United States and intervening in FX markets.
Switzerland has a $11.5 billion current account surplus with the
United States in the June quarter, slightly down from March.
    
    
             
  
      
    4/ DERIVATIVES
    Currency derivative markets show little evidence that
traders are betting big on any franc downside. 
    Implied volatility gauges on euro-franc are low and a few
strikes strewn around the 1.02 to 1.05 francs per euro level
indicate traders expect more gains for the franc. Strikes are
levels around which traders put large bets in case the exchange
rate hits that level. On Wednesday, the exchange rate was at
1.0628 franc per euro.
    Comparatively, hedge funds had large short bets in the
futures markets suggesting any more franc gains can force some
of these positions to be unwound causing more gains for the
franc.
    
    
    

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
SNB intervention    https://tmsnrt.rs/30WNV7Q
CHF positioning    https://tmsnrt.rs/3jHaPqr
CHF interest rates    https://tmsnrt.rs/3vRPr6U
CHf valuations    https://tmsnrt.rs/2ZrtfUI
swiss surplus    https://tmsnrt.rs/3jGTWMK
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Saikat Chatterjee in London and John Revill in
Zurich; Additional reporting by Elizabeth Howcroft in London;
Editing by Sujata Rao and Shailesh Kuber)
 ((saikat.chatterjee@thomsonreuters.com; +44-20-7542-1713;
Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))