Macro and Vol Commentary
The Swiss Franc appreciated rapidly over the course of last months, finding support at 0.92 in the first week of January. With the central bank meetings underway until March and signs pointing to easing energy concerns for now, what is the outlook for USDCHF?
- GDP growth remained broadly expansionary in Q3 2022, growing at 0.2% y/y, in line with the 2022 average.
- Growth prospects are still slowing, given the souring demand outlook and energy strain on the economy
- The State Secretariat for Economic Affairs has cut 2023 once again for GDP to expand at just 1.0% in 2023.
- The downgrade is attributed to risk for the 2023/24 winter, while the energy crisis for this year has softened on the forecast of warmer temperature
- With stockpiles of energy still historically high, and the abundant use of cheaper hydropower, electricity prices are likely to stay lower for the majority of January.
- Wholesale electricity prices totalled EUR219/MWh in December, less than half of the August highs of EUR403/MWh.
- While this marks half of last year’s growth, Switzerland is still more likely to dodge the recession this winter.
- From the domestic standpoint, we have also seen improvement in the consumer sector
- The leading indicator improved in December up to 92.2 as the prospects of the energy prices alleviated some of the pressures from consumers.
- Real retail sales are declining, but the downside momentum slowed in December as it weakened at 1.3% y/y
- Likewise, the manufacturing sector showed signs of improvement as it edged back to 54.1 from 53.9 on signs of strengthening supply chains and softening inflationary pressures
- Producer prices continued to soften, declining by 0.5% m/m and slowing on a year-by-year basis to 3.8%
- Inflation in line with other European nations is seen slowing on a y/y basis and now deflationary on an m/m basis
- December figure came at 2.8% y/y, while core accelerated to 2.0% y/y
- Swiss inflation reached the peak of 3.5% in August, and whilst a 3-decade high, still significantly lower in comparison to its European counterparts thanks to the high regulation of prices in the economy.
- Moreover, currency appreciation in recent months helped to prevent inflation from being imported from the rest of Europe.
- Still, CPI should jump back up in January as the adjustment in the electricity costs and health insurance kick in.
- We expect to see accelerated softness in pricing pressures in H1 2023, with the terminal rate settling just above the government threshold of 2.0%
- In line with other central banks, the Swiss policy rate increased by 50bps to 1.00% in December
- This is down from a 75bps hike in the previous meeting in September, totalling 175bps of hikes in 2022
- The rate of increases, however, is well below the 250bps from the ECB and 340bps from the BOE
- This is because of the lower peak inflation reading in Switzerland
- We now expect a 25bps hike in March
- High inflation rates in the first few months of this year could prompt policymakers to hike by 25bps.
- After that, the policymakers will most likely hold the rates and go into a wait-and-see mode before softening the terminal rate at the start of 2024
- Still, we expect further tightness to be limited in comparison to other CBs, given that Swiss rates are higher in real terms and have a much greater impact on the economy as a whole.
Switzerland, in comparison to other central banks, sees the scale and size of interest rate increases much shallower this year than in the rest of Europe, thanks to the limited impact of rising prices on the real economy. Still, the nation faces one of the starkest cases of how the tightening monetary environment has shifted the backdrop for central banks in relation to fiscal consequences. Indeed, a similar trend is seen in other European nations, where national central banks are facing pressures from diminishing contributions to domestic public financing. Overall, the economy’s outlook remains more benign than anywhere else in the developed world and given the Franc’s safe-haven properties amid growing recessionary fears, we expect the currency to remain in the higher ranges of 0.91-0.94 in the near term.
Sources: S&P Global, Federal Statistics Office of Switzerland, Federal Custom Administration, KOF Leading Economic Indicators
As per the above we favour positions showing a stronger CHF in the near term with inflation data in the US cooling, expectations of a FED pivot in the next few months and the Franc’s safe haven status amongst macro recession fears. In vol space over the last year spot has generally realised higher than implied and with continuing expectations for macro-economic recession we favour slight long vega/gamma positions.
USDCHF Realised vs Implied Volatility
USDCHF Trade Idea
- Buy 3 month USDCHF EKI Put option, 10m USD notional, 0.9300 strike/0.9000 barrier for circa 181k USD cost (vanilla equivalent 230k USD for reference)
- Sell 3 month USDCHF Call Spread to reduce upfront cost, 10m USD notional per leg with 0.9400 and 0.9600 strikes for circa rec 50k USD
- Total structure cost circa 131k USD
USDBRL NDO Positioning Data 28/12/2022 - 04/01/2023
USDBRL remained thin in the first week of January, with the range tightening into 5.00-5.80 until the end of the month. This highlights a lack of conviction for prices out of the current range. There are a few call options with larger notionals expiring in the coming week, and we might see some moderate upside then. With the number of options diminishing and the size of notional increasing in the near term, we expect the pair to remain relatively inbound.
USDBRL NDO Positioning Data 04/01/2023 - 11/01/2023
USDCNY Vanilla Positioning Data 28/12/2022 - 04/01/2023
USDCNY saw the range tighten sharply into 6.60-7.10 in comparison to the last week of December, when the number of calls and puts were spread out between 6.60-7.40 to expire in particular on January 9th, the scheduled reopening of the Chinese economy from restrictions. Likewise, the number and the size of the notional of the futures increased, with calls seeking cover up to 7.40, whilst the puts remain in a tight range. Whilst the sentiment has improved given market participation, the outlook for the currency remains uncertain in the near term as the proportion of calls equals that of the puts.
USDCNY Vanilla Positioning Data 04/01/2023 - 11/01/2023
USDCHF Vanilla Positioning Data 11/11/2022 - 11/12/2022
USDCHF trading range shifted strongly into 0.8 as the franc appreciated against the dollar during December. The number of futures reduced, and the range widened, with near-term expiring closely settled in the 0.90-0.95 range, suggesting the current has found a support level. After that, the market outlook becomes more uncertain. In March, when the next central bank meeting is set to take place, the call cover is seen increasing up to 1.10. We expect the currency to strengthen then.
USDCHF Vanilla Positioning Data 11/12/2022 - 11/01/2023
Charts and Tables
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
Key Events & Releases
JP Morgan Global FX Volatility
The index improved sharply yesterday, jumping above the near-term resistance to settle at 10.94, the highest level so far this month. The stochastics are strengthening sharply into the overbought, and the MACD diff is positive and diverging. A strong jump higher yesterday could set the scene for higher prices above 11.00 to 11.27, which is an early-December high. The upside momentum is also supported by a jump above all of the moving averages at 10.65, which should create robust support levels in the meantime. However, if these levels do not hold, the next support levels stand at 10.50 and 10.00, respectively. There is an appetite for higher levels forming, but resistance at 11.00 needs to be breached first to confirm the continuation of the outlook.
The dollar index has continued to edge lower in recent weeks, following the longer-term downward trend we have seen by the end of the year. The index has already broken below the support of 103 and now trades at 102.13. The stochastics have followed the trend but now suggest that the level might be oversold. The MACD diff is negative and diverging. The indicators suggest that there is still an appetite for lower levels in the near term, but the level is oversold, and a change of trend is imminent. The next robust level of support stands at 102, which also marks the June 2022 low before the 101.03 level. Alternatively, if the index finds support at the current level, the upside is capped by the moving averages at 103.72 and 104.54, respectively. The candles have diminished in size as the prices edged closer to the near-term support suggesting a weakening conviction for lower prices, and we expect this level to be tested today.
The pair has been fluctuating in the 0.9196-0.9359 range in recent weeks, the momentum that has carried on since the year-end. Most recently, the range narrowed to trade between the moving averages levels of 200 Ma at 0.9318 on the upside and 100 and 50 MA at 0.9285 on the downside. The indicators, however, suggest growing momentum on the downside, and the MACD diff is positive and about to converge on the downside. The indicators suggest that a sell signal might be building soon, but for that to be confirmed, the moving average support levels must be broken first before re-testing the 0.9196 level. Alternatively, if 200 MA is broken above, this could set the scene for higher prices to 0.9359 and 0.94. We expect to see some softness in the near term but for prices to continue to trade within the broader range.