UBS has released a report analyzing the impact of the unexpected interest rate cut by the Swiss National Bank (SNB) in March on currency markets. The SNB's early action, before other major central banks, sparked a wave of carry trades, leading to a significant weakness in the value of the Swiss franc against major currencies, especially the euro. The yield spread between the Swiss franc and the euro, now over 200 basis points, has pushed the pair higher.
The futures market indicates a significant accumulation of short positions in Swiss francs, indicating downside risks to the exchange rate. However, UBS expects that these short positions are likely to limit the upside in USD/CHF around the 0.92 level.
The Swiss economy is expected to maintain a growth rate of about 1.5%, while growth in the United States is expected to slow from 2.4% this year to 1.4% next year. The SNB is expected to cut interest rates by 50 basis points by September, keeping interest rates at 1% over the forecast horizon.
UBS also expects the Fed to begin interest rate cuts in September, totaling 100 basis points by June 2025. This policy shift is expected to keep the Swiss franc under pressure until the Fed cuts interest rates later in the year.
The report indicates that the outcome of the US elections, whether Biden or Trump wins, is unlikely to significantly affect the US dollar, as many of Trump's policies have already been adopted by the Democratic leadership.
The report also discusses how geopolitical tensions surrounding the US elections could impact currencies. Increased tensions may inflate the Swiss franc, while escalating military rhetoric usually benefits the US dollar, affecting USDCHF to a lesser extent.
In terms of investment implications, UBS expects USDCHF to remain above 0.90 in the coming months, with a possible decline as the Fed begins to cut interest rates. The company sets support for the USD/CHF at 0.85 and resistance at 0.92.
The report concludes that higher global growth could strengthen the euro and, to some extent, the Swiss franc relative to the US dollar.
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