The swing in USDCHF this week has been stomach turning. The North Korean missile test reintroduced geopolitical tensions forcing FX markets to rotate back into traditional safe-haven currencies against the USD (EURCHF was basic unmoved due to the nature of the conflict). Yet, investors’ concern was short-lived prompting a sharp reversal. While our conviction in carry trades has moderated slightly (see Weekly Market Brief) in the near term, loose monetary policy conditions will support risk-taking. Capital inflows indicated that higher yielding assets especially in EM continued to benefit from the lower global risk premium. Highlighting the decline in risk aversion, the US 10-year yields have fallen into 2.12% challenging June 17 lows. In regards to the CHF, the SNB remains on the defensive despite the franc rapid depreciation against the Euro.
The SNB balance sheet continues to expand to offset CHF strength and member that indicate that a 20% proportional investment into equities. Elsewhere, the ability of create capital and buy “real” equities (all the while negative interest rate push investors out of cash into stocks) has generated investors demand for the Swiss National Bank stock (SNBN). The stock has now to climb safely above the chf3000 handle. The solid proposition of a risk-taking environment and a central bank focused on debasing their currency makes CHF the ideal carry funding currency. With demand for EM FX high CHF should stay weak.
By Peter Rosenstreich