USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >8%, the Fed has been pressured to tighten policy aggressively, hiking rates by 75bsp at their June meeting, and continuing with Quantitative Tightening. STIR markets suggests aggressive policy action pricing a terminal rate of >3.8% by 2Q23 which should be a positive input for the US Dollar . Safe haven flows have also supported the USD as it’s usually inversely correlated to the global economy and global trade, appreciating when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Expectations of a cyclical slowdown, accompanied by multi-decade high inflation and synchronized removal of monetary policy stimulus from major economies has seen investors shun risk assets and even bonds (usually considered a safe haven), and the USD has been a key benefactor of the rush to safety as economic prospects have deteriorated. Even though US bonds are considered safe havens, the current high inflation has seen a strong stock-to-bond correlation and has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has benefited from the rush to safety.
POSSIBLE BULLISH SURPRISES
As aggressive Fed policy has been supporting the USD, any incoming data (especially inflation ) that sparks further hike expectations, or additionally any comments from FOMC members that signals even more aggressive policy could trigger bullish reactions in the USD. As the cyclical outlook for the global economy is very bleak, and the USD is considered a safe haven, it means any incoming data that exacerbates fears of recession and triggers a big rush to safety could trigger bullish USD reactions. Further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields like rising commodity prices and inflation expectations could also trigger further USD bullish reactions.
POSSIBLE BEARISH SURPRISES
More recently the USD has reacted more cyclically to incoming data which could suggest markets is shifting from safe haven focus to the rising risks of recession. The worse growth data slows, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad growth data could trigger bearish reactions in the USD despite its safe haven appeal. Tactically the USD is trading at cycle highs, and aggregate CFTC positioning is still close prior highs which acted aslocal tops for the USD. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term. With a lot already priced for the Fed, it won’t take much for the Fed to disappoint markets on the dovish side. Thus, any FOMC comments that suggests more concern about the economy than inflation could trigger bearish reactions in the USD
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays aggressive and cyclical concerns put pressure on risk assets. But we do want to be mindful that lots has been priced for the USD, and growth deteriorates, we are expecting that the weigh on the USD if markets start pricing in a higher likelihood of a less hawkish Fed as a result of higher risks of recession. Furthermore, given tactical and CFTC positioning, we would prefer deeper pullbacks for new med-term USD longs, but shortterm catalyst can still offer shorter bearish sentiment trades against the current strong bull trend.
CHF
FUNDAMENTAL OUTLOOK: WEAK BULLISH
BASELINE
The CHF has been supported in recent months as STIR markets have steadily priced in higher interest rates for Switzerland as
well the SNB’s reluctance to intervene in the currency markets to weaken the CHF. This past week the SNB took a very aggressive
policy step by hiking rates with 50bsp and removing their previous classification that the CHF is ‘highly valued’.
Unlike other central banks, the SNB has chosen to try and tackle inflation before it runs rampant by hiking rates aggressively.
Their hike in June was the first hike since 2007, and if the bank follows through with a hike in September it will mean Switzerland
will have positive interest rates for the first time in 8 years.
There is scope for further strength from the CHF in the months ahead with 4 supporting drivers. The first is the SNB’s hawkish
tilt, the second is the bank’s acceptance of a stronger CHF will less intervention seen in recent months, the third is negative
underlying risk sentiment driven by the global cyclical slowdown and fourth is rising inflation .
The SNB did note that they are willing to be active in the foreign exchange market to ensure appropriate monetary conditions
which means too much CHF strength could get the wrong attention from the bank.
POSSIBLE BULLISH SURPRISES
Any incoming data (especially inflation ) 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 as active in trying to devalue the CHF through sight deposits as they have been in recent years. With
the bank now on a hiking cycle, 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 surprised with a 50bsp hike and signalled, that unlike other central banks, they will not get behind the curve. That has
seen STIR markets fully price in another 50bsp for the September meeting. Apart from a hawkish central bank , we also have the
economy on a steady footing, as well as less risk of intervention as SNB’s Jordan said they no longer see the CHF as highly valued
(there is of course risk that they could intervene if the CHF appreciates too much too fast). This means that the bias for the CHF
has changed to bullish and we’ll be looking for big dips in the CHF for buying opportunities.
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >8%, the Fed has been pressured to tighten policy aggressively, hiking rates by 75bsp at their June meeting, and continuing with Quantitative Tightening. STIR markets suggests aggressive policy action pricing a terminal rate of >3.8% by 2Q23 which should be a positive input for the US Dollar . Safe haven flows have also supported the USD as it’s usually inversely correlated to the global economy and global trade, appreciating when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Expectations of a cyclical slowdown, accompanied by multi-decade high inflation and synchronized removal of monetary policy stimulus from major economies has seen investors shun risk assets and even bonds (usually considered a safe haven), and the USD has been a key benefactor of the rush to safety as economic prospects have deteriorated. Even though US bonds are considered safe havens, the current high inflation has seen a strong stock-to-bond correlation and has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has benefited from the rush to safety.
POSSIBLE BULLISH SURPRISES
As aggressive Fed policy has been supporting the USD, any incoming data (especially inflation ) that sparks further hike expectations, or additionally any comments from FOMC members that signals even more aggressive policy could trigger bullish reactions in the USD. As the cyclical outlook for the global economy is very bleak, and the USD is considered a safe haven, it means any incoming data that exacerbates fears of recession and triggers a big rush to safety could trigger bullish USD reactions. Further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields like rising commodity prices and inflation expectations could also trigger further USD bullish reactions.
POSSIBLE BEARISH SURPRISES
More recently the USD has reacted more cyclically to incoming data which could suggest markets is shifting from safe haven focus to the rising risks of recession. The worse growth data slows, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad growth data could trigger bearish reactions in the USD despite its safe haven appeal. Tactically the USD is trading at cycle highs, and aggregate CFTC positioning is still close prior highs which acted aslocal tops for the USD. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term. With a lot already priced for the Fed, it won’t take much for the Fed to disappoint markets on the dovish side. Thus, any FOMC comments that suggests more concern about the economy than inflation could trigger bearish reactions in the USD
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays aggressive and cyclical concerns put pressure on risk assets. But we do want to be mindful that lots has been priced for the USD, and growth deteriorates, we are expecting that the weigh on the USD if markets start pricing in a higher likelihood of a less hawkish Fed as a result of higher risks of recession. Furthermore, given tactical and CFTC positioning, we would prefer deeper pullbacks for new med-term USD longs, but shortterm catalyst can still offer shorter bearish sentiment trades against the current strong bull trend.
CHF
FUNDAMENTAL OUTLOOK: WEAK BULLISH
BASELINE
The CHF has been supported in recent months as STIR markets have steadily priced in higher interest rates for Switzerland as
well the SNB’s reluctance to intervene in the currency markets to weaken the CHF. This past week the SNB took a very aggressive
policy step by hiking rates with 50bsp and removing their previous classification that the CHF is ‘highly valued’.
Unlike other central banks, the SNB has chosen to try and tackle inflation before it runs rampant by hiking rates aggressively.
Their hike in June was the first hike since 2007, and if the bank follows through with a hike in September it will mean Switzerland
will have positive interest rates for the first time in 8 years.
There is scope for further strength from the CHF in the months ahead with 4 supporting drivers. The first is the SNB’s hawkish
tilt, the second is the bank’s acceptance of a stronger CHF will less intervention seen in recent months, the third is negative
underlying risk sentiment driven by the global cyclical slowdown and fourth is rising inflation .
The SNB did note that they are willing to be active in the foreign exchange market to ensure appropriate monetary conditions
which means too much CHF strength could get the wrong attention from the bank.
POSSIBLE BULLISH SURPRISES
Any incoming data (especially inflation ) 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 as active in trying to devalue the CHF through sight deposits as they have been in recent years. With
the bank now on a hiking cycle, 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 surprised with a 50bsp hike and signalled, that unlike other central banks, they will not get behind the curve. That has
seen STIR markets fully price in another 50bsp for the September meeting. Apart from a hawkish central bank , we also have the
economy on a steady footing, as well as less risk of intervention as SNB’s Jordan said they no longer see the CHF as highly valued
(there is of course risk that they could intervene if the CHF appreciates too much too fast). This means that the bias for the CHF
has changed to bullish and we’ll be looking for big dips in the CHF for buying opportunities.
