UBS released a report analyzing the impact of the Swiss National Bank's (SNB) unexpected March rate cut on currency markets. The SNB's early action, ahead of other major central banks, sparked a flurry of carry trades, leading to a significant weakening of the Swiss franc against major currencies, particularly the euro. The yield differential between the Swiss franc and the euro, now over 200 basis points, has fueled a surge in the EURCHF pair.
Market futures suggest a substantial build-up of short positions in the Swiss franc, indicating downside risks for the USDCHF exchange rate. However, UBS anticipates that these short positions will likely cap the upside of the USDCHF pair around the 0.92 level.
The Swiss economy is projected to maintain a growth rate of around 1.5%, while U.S. growth is expected to slow from 2.4% this year to 1.4% next year. The SNB is predicted to further reduce rates by 50 basis points by September, holding rates at 1% through the forecast horizon.
UBS also forecasts the Federal Reserve to commence rate reductions in September, totaling 100 basis points by June 2025. This policy shift is expected to keep the Swiss franc under pressure until the Fed's rate cuts later in the year.
The report notes that the outcome of the U.S. election, whether a win by Biden or Trump, is unlikely to significantly affect the U.S. dollar, as many of Trump's policies have already been adopted by the Democratic leadership.
The report further discusses how geopolitical tensions surrounding the U.S. election could influence currencies. An increase in tensions might inflate the Swiss franc, while heightened military rhetoric traditionally benefits the U.S. dollar, affecting the USDCHF to a lesser extent.
In terms of investment implications, UBS anticipates the USDCHF to remain above 0.90 in the coming months, with a potential decline as the Fed starts to cut rates. The firm identifies support for the USDCHF around 0.85 and resistance around 0.92.
The report concludes that an uptick in global growth could bolster the euro and, to some extent, the Swiss franc relative to the U.S. dollar.
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