(24 MAY 2018)DAILY MARKET BRIEF 1:Italy got its prime minister, now what?

The Swiss franc took a big hit on Wednesday afternoon after Sergio Mattarella names Giuseppe Conte as Prime Minister as USD/CHF rose more than 0.6% to 0.9978. Similarly, EUR/CHF climbed from 1.1581 to 1.1660, up 0.68%. However, the Swissie’s losses were proved to be short-lived as the greenback resumed its debasement.

In the short-term, we expect that the franc appreciation against the euro will ease as the uncertainty generated by the Italian situation becomes of secondary importance. Nevertheless, the League and the 5-star Movement have promised to take a bunch of measures that will eventually widen the country’s budget deficit (cancellation of pension reform, flattening tax, increase spending, etc.), which will raise the hairs of investors’ back. Therefore, we believe that over the medium-term, we may see some renewed buying pressure on the Swiss on the franc against the euro.

However, for USD/CHF this is a complete different story, as fundamentals are not supportive for further dollar appreciation. US interest rates have started to move lower recently with the 2-year yield easing to 2.51%, while the 10-year one slid below the 3% threshold. The trade tension between China and the USA have eased recently, as the Trump administration is backpedalling. Moreover, the latest Trump geopolitical manoeuvres have affected negatively the relationship between the US and most of its allies. 

By Arnaud Masset