US Dollar Tipped to Advance on Swiss Franc by BNP Paribas

Tax reform should give the Dollar a helping hand over coming months, and the safe-haven Swiss Franc is likely to absorb much of the pressure.

The Dollar could end 2017 on a positive note suggest analysts at French investment bank BNP Paribas, who reckon gains could be particularly notable against the Swiss Franc.

Analysts cite multiple factors behind the call; ranging from short-term and long-term bond yield differentials, to the current positioning of traders and ignorance by the market over the Trump administration’s chances of being able to secure tax reforms in the near future.

“In the final weeks of the year, currency markets often appear more driven by position adjustments and other year-end flows than by fundamental developments,” says Daniel Katzive, head of FX strategy North America at BNP Paribas.

“Nonetheless, market dislocations can also generate trading opportunities and we believe the USD’s weakness in November – after two months of recovery – has opened up an opportunity for new tactical long positions.”

Katzive and the BNP team prefer to bet on a rise in the Dollar relative to the Franc because, despite the latter also being a safe haven, the Swiss currency is not as sensitive as the Japanese to changes in global risk appetite. But just like in Japan, as well as other parts of Europe, Swiss interest rates are negative and US interest rates are expected to rise further over the coming months.

“We continue to view the CHF as an attractive low-yielding funder for USD long positions,” says Katzive. “The CHF lacks the high sensitivity of the JPY to risk aversion events and avoids the upside risks for the EUR associated with a potentially more hawkish message from the European Central Bank (ECB) at its December policy meeting.”

In short, the Swiss Franc offers scope to exploit the largest gap between policy interest rates available, while avoiding the risks that would come with a bet against certain other currencies.

“Front-end rate spreads have moved in the USD’s favour in Q4 2017,” says Katzive, referring to short-term bond yields. “Despite this, the dollar has struggled to sustain gains.”

Above: USD/CHF shown at daily intervals.

The correlation between short term interest rates and their currency counterparts has been poor in 2017, according to Katzive, although differences in short term cash rates can have a sizeable impact on hedging costs and investment returns for corporations.

This could mean it will only be so long before “real money” flows force a return to traditional equilibriums, in a market where speculators have taken over during recent quarters. Similar is true of long term rates, according to Katzive.

“Our Equity and Derivative Strategy team’s metrics continue to suggest that markets have not yet heavily priced in the successful passage of US tax legislation,” the strategist adds. “This is despite the fact that tax bills are advancing in parallel in the US House and Senate at a faster than generally expected pace.”

Senate majority leader Mitch McConnel said Thursday he expects the senate version of the tax bill to be passed by a vote at around 11:00am eastern time, which is shortly after the London close Friday.

After the senate bill passes, a joint committee of senate and house republicans will work to craft a unified bill that can gain sufficient support across congress.

“Our BNP Paribas positioning framework suggests USD short positions built up over the summer were covered during September and October as the USD bounced,” says Katzive. “However, short positions have been built up again in November.”

This positioning is not yet at extreme levels, according to Katzive, although the clustering of short-sellers around very similar price levels could offer scope for another “short-squeeze” if the Dollar begins to gain ground in December.

“As a result of the above considerations, we are adding a long USDCHF recommendation to our portfolio, targeting a move to 1.02 with our stop loss set at 0.9725,” Katzive signs off, in a Friday note.

The USD/CHF rate was quoted 0.17% higher at 0.9856 during noon trading Friday.

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