Currencies. CHF safe-haven status confirmed

Date: 13 September, 2018 - Blog

The Swiss economy grew at a fast pace in H1 2018, boosted by income from world cup licenses, robust foreign demand and the CHF depreciation. The GDP grew by 0.7% QoQ in 2Q18. Moreover, growth figures were strongly revised up. Annual GDP growth reached 3.2% yoy in both Q1 and Q2. The Swiss economy has recorded an above 0.7% qoq growth rate for the 5th quarter in a row, an event not seen since 2015 when the SNB removed its FX peg. For H2, the context will be more challenging given the recent sharp CHF rebound.

The KOF, an economic leading indicator, fell in August far from its February peak level. PMI indicators are also on a downward trend. However, both remain at historically high levels. Moreover, with the increase of global risks and uncertainty and given its safe-haven status, the CHF has appreciated since this summer. This is likely to drag down growth in the coming months.

After a long deflationary period, CPI inflation has been in positive territory since January 2017. Inflation has gradually increased and reached 1.2% in July and August. However, core metric remains low and stable at around 0.5%. For the rest of year, the CHF strengthening is likely to add downward pressures.

At its June meeting, the SNB left its policy rates unchanged in negative territory. It also reiterated its willingness to intervene in the foreign exchange market as necessary. Its ultra-loose monetary policy is likely to continue as it views the CHF as a highly valued safe-have asset. Indeed, events in Italy and Turkey have played their role in sending the CHF higher, but the threat of further Russian sanctions too. We do not expect anything new from the SNB at its September 20th meeting. We do not expect any rate hike before the ECB starts raising its own rates i.e. not before the end of the summer of 2019. The SNB won’t hike interest rates before December 2019.


CHF Speculative positioning

.IMMCHF U Index (POSITION IMM CH 2018-09-07 07-13-07

Source: CFTC

 Since the CHF rally began, the EUR/CHF has weakened to 1.12 from 1.20. At the same time, the net short speculative positioning has just slightly been trimmed. Investors remain strongly short the CHF. A huge risk-off swing could trigger an important short covering move.

  • SNB ultra-loose monetary policy is likely to continue
  • The 1.10/1.15 is the new EUR/CHF paradigm
  • The CHF remains exposed to upside  risks and still represents a cheap hedge