Switzerland’s negative rates have had little impact, but further rate cuts and the deterioration in the balance of payments are likely to soften the currency.
– BNP Paribas positioning analysis indicates CHF positioning has switched from a large short to a modest long.
– New trade: long USDCHF position via a 0.95/1.00 1y call spread for 95bp.
The CHF has stabilised over the past week around 1.00 EURCHF and 0.85 USDCHF. Our assessment of the fair value of the CHF suggests the currency will weaken gradually this year. As a result of the outlook for SNB policy and in light of the deterioration in Switzerland’s balance of payments we revised our CHF forecasts last week and now expect EURCHF and USDCHF to rise to 1.08 and 0.98, respectively, by the year end. We recommend a bullish USDCHF option structure to position for this bearish CHF view.
Typically, one of the first relationships to monitor when valuing an exchange rate is the 2y swap differential. However, the impact of the SNB’s rate cuts on the CHF has been limited. One factor limiting impact of negative rates could be the threshold applied to the negative deposit rates which means that the rate
only affects a small proportion of the CHF 340bn of deposits held at the SNB. Our economists expect a further 0.5% rate cut, but for this policy to have a substantial impact on the CHF, the SNB will need to widen the scope of assets that it is applied to.
– BNP Paribas positioning analysis indicates CHF positioning has switched from a large short to a modest long.
– New trade: long USDCHF position via a 0.95/1.00 1y call spread for 95bp.
only affects a small proportion of the CHF 340bn of deposits held at the SNB. Our economists expect a further 0.5% rate cut, but for this policy to have a substantial impact on the CHF, the SNB will need to widen the scope of assets that it is applied to.
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