Sell the Swiss Franc, Buy the British Pound, Goldman Sachs Says

Image © SNB

The Pound to Swiss Franc exchange rate could be set to recover more of its recent losses in the days and weeks ahead, according to Goldman Sachs strategists, who’ve tipped GBP/CHF as a buy.

GBP/CHF has recovered around half of its late July and early August losses in recent trade and Goldman Sachs strategists say the pair could have scope to rise further, to 1.16, in the days or weeks ahead.

“Most importantly in our view, the SNB has reported that it intervened to the tune of CHF 0.3bn in Q1. We find that notable because it demonstrates the SNB's fairly active currency policy, and it reveals that the Bank is more willing to “fine tune” currency moves than its G10 counterparts,” they said in a note to clients late Friday.

“Even after the end of negative interest rates, intervention has remained an important and often-used tool for the SNB. Taken together, this makes us more comfortable with CHF funding now on a tactical basis than we otherwise would be with growth fears swirling and geopolitical tensions still simmering,” they added.

Above: GBP/CHF shown at daily intervals with Fibonacci retracements of May fall and selected moving averages denoting possible areas of technical resistance for Sterling.

The bank tipped GBP/CHF as a buy around 2.12 on Friday with a stop-loss at 2.10 and a target of 1.16, citing the relative interest rate backdrop and ‘carry’ proposition, as well as the Swiss National Bank’s apparent preferences in relation to the exchange rate, which are motivated by its inflation outlook.

Sight deposit data from the central bank revealed last week that it intervened significantly to prevent the exchange rate from strengthening too much when the market walked away from once-popular carry trades in late July and early August, which is just the latest indication that it may have a preference for a weaker Franc.

Previously, the SNB’s balance sheet report revealed in June that it sold a small amount of Francs and bought foreign currency in the first quarter, even as the franc softened largely of its own accord. Meanwhile, the latest forecasts have confirmed that the SNB expects inflation to remain benign, a way below the target up ahead.

“Because of the SNB’s focus on the currency, this is one place where the distribution of currency outcomes looks narrower than on the rates side. For these reasons we recommend that investors go long GBP/CHF with a target of 1.16 and a stop of 1.10,” the Goldman Sachs strategists said.

Above: GBP/CHF shown at weekly intervals with selected moving averages and EUR/CHF.

The Swiss National Bank’s exchange rate preference and currency policy suggests the downside risk in GBP/CHF may be quite limited, which is one reason the Goldman Sachs team likes buying the pair, but the relative interest rate outlook and other fundamentals also support a continued recovery of the pair.

Swiss interest rates remain among the lowest in the world and current market pricing suggests the UK is on course to have the second highest interest rate in the G10 group by year-end, which is why Goldman Sachs strategists view GBP/CHF as one of the better ‘carry’ trade opportunities among major currencies.

“Our economists look for the SNB to keep rates steady, against our central view that global growth should hold up reasonably well. That type of backdrop should still be supportive for CHF-funded carry trades. But it is important to recognize that if the environment shifts then this policy strategy would not look as compelling,” they said.

“With the SNB’s focus on the currency, and inflation risks now more balanced, we think they would not hesitate to ‘pull the rates lever’ in this scenario. For that reason, we think CHF looks less attractive as a portfolio hedge, and instead think CHF funding is a good way to position with policy support for more benign outcomes,” they added.