Time to short the Swiss franc
By Peter Rosenstreich
After a stomach-turning week of swings in USD/CHF, we believe that in the near term, loose monetary policy conditions will support risk-taking in emerging markets. With demand for emerging-market FX high, the CHF should stay weak.
The Swiss National Bank remains defensive, despite the franc’s depreciation against the Euro. The SNB continues to bloat its balance sheet to offset CHF strength. Meanwhile, its negative interest rates have pushed investors out of cash into stocks – including the stock of the SNB itself, which over the past year has doubled to over CHF 3,000 per share. The combination of a risk-taking environment and a central bank focused on debasing its money makes CHF the ideal carry funding currency.
Dollar to bounce back against Euro on US jobs/inflation
By Arnaud Masset
EUR/USD has bounced back in late European session yesterday after free falling as much as 2% over the last three days. We expect the greenback to rally, because: 1) European Central Bank President Mario Draghi will come out dovish at the 7 September monetary policy meeting; and 2) US Federal Reserve Chair Janet Yellen will soon announce the beginning of a balance-sheet unwinding.
The Fed’s favourite gauge of inflation matched expectations yesterday: core personal consumption expenditure in July rose 1.4% year on year, down from 1.5% in June. Lacklustre inflation is a bad omen for ‘normalising’ Fed monetary policy, but the economy’s recent gains in momentum should translate at some point into a pick-up in consumer prices.
August’s jobs report, due for release later today, will be key to restoring confidence in the inflation outlook. A strong read in average hourly earnings should lift inflation as US workers have more disposable income. Wages are expected to rise 2.6% year on year in August, up from 2.5% in July.