CHF: Linked to US election – RBC CM

Elsa Lignos, Research Analyst at RBC Capital Markets, suggests that not much has changed in the short-term outlook for EUR/CHF.

Key Quotes

“Since the UK referendum, it has been trading sideways in a 1.08-1.10 range. Its brief dip to 1.0622 just after the referendum is proof that CHF is still very sensitive to negative EU/EZ risk. But most of the political risk we see is a long-term (1-2 year) rather than short-term story. Our end year EUR/CHF forecast is unchanged at 1.08. The date for the Italian constitutional referendum has now been confirmed (Dec 4) and polls show Yes and No are neck and neck. And there seems to be a widespread assumption that a No vote would lead to early elections (and possibly the rise of the Eurosceptic Five Star Movement to power). But while it is a possibility it is also a low probability outcome. It is more probable that we would get a new executive from the current Parliament, which would not be meaningful enough to driver EUR/CHF much lower.

In fact a more interesting political risk to CHF is the US election. Specifically, if either Presidential candidate decided to introduce a repatriation tax break, we could see sizeable capital flows back to the US. The experience of the Homeland Investment Act suggests USD/CHF could be one of the biggest beneficiaries. Technically, USD/CHF is still in a contracting range but is testing the topside at 0.9829 as we go to press. A close above here could open the way for a positive trend to emerge. The next resistance levels are 0.9885 and 0.9950. Support is at 0.9630.

6-12 Month Outlook – Stuck in low inflation world

Our long-term forecast for EUR/CHF is also unchanged (1.11 at end-2017). Barring a major crisis, it will be determined by who sees inflation first: Switzerland or the Euro area. Our guess would be the Euro area. Extrapolating the SNB’s latest forecasts, it would take until Q4 2019 or even early 2020 to reach the 2% target. The 1.3% conditional inflation forecast for Q2 2019 also assumes rates stay at -0.75% throughout the forecast period. That weak inflation outlook should allow the SNB to keep its nominal rates lowest in the world. While its real rates are amongst the highest in G10, we have found that nominal rates are more important in driving spot FX returns. Valuation is often suggested as a reason to be short CHF but the truth is CHF trades persistently above what “fair value” (at least in a PPP sense) would suggest.”