After the meeting of the National Bank, the franc faced the biggest sell-off in seven years. However, the Swiss currency quickly recovered lost positions against the euro and pound and rose in the USDCHF pair. Let us discuss the Forex outlook and make up a trading plan.
Monthly Swiss franc fundamental forecast
Despite the worst drawdown of the Swiss franc against major world currencies since 2015 in response to the announcement of the results of the SNB September meeting, the EURCHF and GBPCHF went down. The USDCHF completely fulfilled the target set in the previous article much earlier than one might have expected. Only the US dollar tried to keep its position against the Swissie.
Buy the news, sell the fact. Traders were preparing for the National Bank’s exit from the 10-year policy of negative rates, counting on a 75-basis-point rate hike. However, some investors expected even a 100-basis-point increase in the borrowing costs. Being disappointed, they started selling off the franc. In fact, the SNB has made it clear that it is not going to stop at 0.5% borrowing costs. According to Thomas Jordan, economic conditions clearly indicate the advisability of further tightening of monetary policy, and the central bank will do everything to return prices to the target.
Dynamics of Swiss inflation
Source: Bloomberg
Although inflation in Switzerland is lower than in neighboring countries, it has risen as high as was not expected. Consumer prices rose 3.5%, more than a 30-year high. The National Bank forecasts their increase to 3% in 2022, to 2.4% in 2023, and to 1.7% in 2024. GDP this year will expand by 2%, less than the previously expected 2.5%.
The sell-off of the franc on the fact of the SNB rate increase did not discourage the bulls on the Swiss currency. Aggressive monetary tightening is not the only advantage of the franc. The Swiss currency is in demand during periods of recession and market turmoil. The war in Ukraine contributed to the fact that the franc ranks 2 or 3 in the list of the best G 10 performers of the year. The approach of early parliamentary elections in Italy contributed to selling EURCHF and GBPCHF. However, in fact, the victory of the far-right Brothers of Italy caused a smaller rise in the safe-haven demand than events in the UK.
When Giorgia Meloni became the Italian Prime Minister, the 10-year Italy bond yield rose by just nine basis points. To compare, the UK bond yield jumped as much as by 29.4 basis points.
Dynamics of bond yields in Italy and UK
Source: Bloomberg
This is because of the plan of the UK government led by Liz Truss to solve the problem of insufficient supply by stimulating demand. Fears about the destabilization of the country’s financial system caused the pound to collapse.
Monthly USDCHF and EURCHF trading plan
I suppose the EURCHF will reach its target at 0.925. The euro area is close to recession or is already in it, and the arrival of cold winter will only exacerbate the situation. If the USDCHF fails to consolidate at 0.99, it will be relevant to sell the pair. The USA is also to face an economic downturn, and an associated drop in Treasury yield will weaken the US dollar.
Price chart of USDCHF in real time mode
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