FX Daily: Softer CHF post-SNB and RMB support into holidays

Valuations and policy could weigh on CHF/CNH.
Group Research, Chang Wei Liang27 Sep 2023
    Photo credit: Unsplash/Adobe Stock Photo

    We expect CHF to soften further after the Swiss National Bank (SNB) surprised markets last week by leaving rates unchanged, contrary to expectations for a rate hike. Since that policy meeting, USD/CHF has rallied by 2% with no major dips. The SNB clearly holds a more balanced view of inflation risks now, having lowered its inflation forecast for end-2024 and 2025 by 10bps to 2.1% and 1.9% compared to its June forecast. Lower imported goods prices were cited as a reason, and this is likely linked to a slowdown in Europe, as well as the strong CHF. We think it is highly unlikely for the SNB to buy CHF as much as when it was fighting hard to contain inflation.  Meanwhile, growth risks have increased appreciably for Switzerland, given a contraction in the Swiss manufacturing sector that accounts for 18% of GDP. Switzerland’s manufacturing PMI now averages 39.2 for Jul-Aug and is even below lows seen during the pandemic in 2020.  Given the over-valuation of the CHF indicated by our DEER model and a newly neutral SNB policy stance, the CHF could see increased usage as a funding currency compared to the JPY, particularly with JPY intervention risk ratcheting higher now. While BOJ kept its dovish policy tone last week, USD/JPY had stayed within our expected 148-150 short-term range, being restrained by Finance Minister Suzuki stating that excessive FX moves are not desirable, and that he is watching FX with a strong sense of urgency.

    In contrast to reduced SNB support for CHF strength, Chinese support for RMB stability remains strong and unwavering. The PBOC had not only set its onshore CNY fixings at stronger than expected levels, but it had also kept fixings steady around the 7.17 handle for eight straight days now, even with the USD strengthening post-FOMC. The RMB is already undervalued based on our DEER model, and further depreciation may not be worth the cost to capital flow stability. Chinese economic data ranging from industrial production, retail sales, and credit had also improved amid stimulus and property easing measures, helping to shore up RMB sentiment. China is also keen to support RMB by tightening offshore RMB liquidity, largely through window guidance for state banks and seasonal demand from the upcoming October week-long holidays. Tomorrow Next points for CNH have turned positive since last Friday, which means that CNH is now offering a higher yield than the USD on a daily rolling basis. Given that we are cautious of USD strength in the short-term, positioning for CHF/CNH weakness looks better from both a carry and directional perspective.

    Quote of the day
    “After potentially one more 25 bps Fed Funds Rate increase later this year, the FOMC holds policy at this level long enough to bring inflation back to target in a reasonable period of time.”
         Minneapolis Fed President Neel Kashkari on  26 Sep 2023

    27 September in history
    In 1937, the first Santa Claus Training School opened in Albion, New York.


    Chang Wei Liang

    FX & Credit Strategist


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