UBS downgrades CHF forecast

UBS have published a report examining the repercussions of the Swiss National Bank's unexpected rate cut in March on currency markets. The SNB's preemptive move, preceding other major central banks, triggered a surge in carry trades, resulting in a notable depreciation of the Swiss franc against major currencies, notably the euro. The widening yield differential between the Swiss franc and the euro, now exceeding 200 basis points, has driven a sharp increase in the EURCHF currency pair.

Market futures indicate a significant accumulation of short positions in the Swiss franc, signaling downside potential for the USDCHF exchange rate. However, UBS foresees that these short positions are likely to constrain the upward momentum of the USDCHF pair around the 0.92 level.

The Swiss economy is projected to maintain a growth rate of around 1.5%, while US growth is expected to slow from 2.4% this year to 1.4% next year. It is anticipated that the SNB will implement an additional 50 basis points rate cut by September, keeping rates at 1% throughout the forecast period.

UBS also forecasts that the Federal Reserve will commence rate reductions in September, totaling a reduction of 100 basis points by June 2025.This policy shift is expected to keep pressure on the Swiss franc until the Fed's rate cuts later in the year.

The report highlights that the outcome of the U.S. election, whether won by Biden or Trump, is unlikely to have a significant impact on the U.S. dollar, as many of Trump's policies have already been embraced by the Democratic leadership.

The report also delves into how geopolitical tensions surrounding the U.S. election could affect currencies. Rising tensions could strengthen the Swiss franc, while increased military rhetoric typically benefits the U.S. dollar, albeit with a lesser effect on the USDCHF pair.

Regarding investment implications, UBS expects the USDCHF to stay above 0.90 in the upcoming months, possibly declining as the Fed begins to reduce rates. The firm identifies support for the USDCHF around 0.85 and resistance around 0.92.

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