GBP CHF - FUNDAMENTAL DRIVERS
GBP
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. At their August meeting, the BoE confirmed this bleak outlook by forecasting the UK economy to fall into recession by 4Q22 and expects the recession to last for five quarters. Even though the bank followed through with a 50bsp hike, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past week made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Headline CPI printing above 10% didn’t help the currency either, further exacerbating stagflation risks.
POSSIBLE BULLISH SURPRISES
Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling.
POSSIBLE BEARISH SURPRISES
Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside.
BIGGER PICTURE
The fundamental outlook for the GBP remains bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully.
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 try and weaken the CHF. At their June meeting, 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 almost a decade. There is scope for further CHF upside in the months ahead with 4 supporting drivers. [1] SNB’s hawkish tilt, [2] the bank’s acceptance of a stronger CHF with less intervention, [3] negative underlying risk sentiment driven by the global cyclical slowdown, [4] 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 CPI on Wednesday) 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. The more aggressive markets think the ECB will be with incoming hikes, the more aggressive they will be for the SNB. Thus, data that trigger hawkish ECB expectations could also be supportive for 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. Further lower repricing of ECB hikes could trigger downside in the CHF as well, and the biggest dovish risk for the currency is a big surprise miss on any incoming CPI data.
BIGGER PICTURE
The SNB surprised with a 50bsp hike and signalled, that unlike other central banks, they will not get behind the curve. 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 the bias for the CHF is bullish and we’re looking for dips as CHF for buying opportunities.
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. At their August meeting, the BoE confirmed this bleak outlook by forecasting the UK economy to fall into recession by 4Q22 and expects the recession to last for five quarters. Even though the bank followed through with a 50bsp hike, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past week made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Headline CPI printing above 10% didn’t help the currency either, further exacerbating stagflation risks.
POSSIBLE BULLISH SURPRISES
Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling.
POSSIBLE BEARISH SURPRISES
Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside.
BIGGER PICTURE
The fundamental outlook for the GBP remains bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully.
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 try and weaken the CHF. At their June meeting, 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 almost a decade. There is scope for further CHF upside in the months ahead with 4 supporting drivers. [1] SNB’s hawkish tilt, [2] the bank’s acceptance of a stronger CHF with less intervention, [3] negative underlying risk sentiment driven by the global cyclical slowdown, [4] 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 CPI on Wednesday) 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. The more aggressive markets think the ECB will be with incoming hikes, the more aggressive they will be for the SNB. Thus, data that trigger hawkish ECB expectations could also be supportive for 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. Further lower repricing of ECB hikes could trigger downside in the CHF as well, and the biggest dovish risk for the currency is a big surprise miss on any incoming CPI data.
BIGGER PICTURE
The SNB surprised with a 50bsp hike and signalled, that unlike other central banks, they will not get behind the curve. 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 the bias for the CHF is bullish and we’re looking for dips as CHF for buying opportunities.
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