thunderpips

USD CHF - FUNDAMENTAL DRIVERS

FX:USDCHF   U.S. Dollar / Swiss Franc
USD

FUNDAMENTAL OUTLOOK: BULLISH

BASELINE

With headline CPI above 8% and Core CPI seeing another acceleration in the SEP CPI data, the Fed is under pressure to continue hiking rates and ramping up QT. Markets expect another 75bsp hike in NOV and currently prices the terminal rate at 4.89%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). Our expectation for a softer USD this past week played to our advantage with a punchy move lower in the Dollar. The week ahead is filled with lots of US economic data and the FOMC policy decision which will all be important drivers for the USD.


POSSIBLE BULLISH SURPRISES

With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.0% terminal rate can trigger further USD upside.


POSSIBLE BEARISH SURPRISES

With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows.


BIGGER PICTURE

The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. We have a very excited economic calendar for the US in the week ahead, with lots of important economic data and the FOMC meeting. For the econ data our expectation is for a cyclical reaction where very good data is expected to support the USD and very bad data expected to pressure the USD. As for the Fed, the main focus will be on whether the FOMC confirms a downshift in the pace and size of hikes.



CHF

FUNDAMENTAL OUTLOOK: WEAK BULLISH

BASELINE

The CHF took quite a beating two weeks ago after the SNB’s 75bsp hike as interest rate markets were already fully priced for a 100bsp move from the bank. Furthermore, in their communication the bank didn’t seem to provide the same stern assurance of much higher rates as they did at their June meeting. This does not change the currency fundamental outlook, but some lower repricing in rate expectations which are accompanied by a currency that has seen a lot of appreciation in recent weeks means we could see the currency’s resilience challenged.


POSSIBLE BULLISH SURPRISES

Any incoming data or SNB comments that causes markets to price in even more aggressive policy from the bank could trigger bullish reactions in the CHF. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bullish reactions in the CHF.


POSSIBLE BEARISH SURPRISES

The SNB has not been trying to devalue the CHF through sight deposits. Any drastic appreciation could spark some intervention and would be a bearish catalyst. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bearish reactions in the CHF.


BIGGER PICTURE

The SNB’s 75bsp hike in September was not enough to support the CHF as their 50bsp hike did back in June, mainly because market expectations were very aggressive going into the meeting. The repricing in the currency was fast and punchy and provided a good short-term opportunity to take advantage of. The currency has struggled to regain any material upside after the meeting, and this week’s CPI could set the tone for the December meeting. A bigger than expected beat could see markets pricing in a higher chance of a 75bsp hike which could see some short-term upside for the CHF, while a big miss could see the current 44bsp priced (at the time of writing) reduced and could pressure the CHF.
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