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For the financial markets, the main lesson from 2019 is that "normalisation" will not happen in the foreseeable future. We will have to set ourselves up in a world of low interest rates, low inflation and permanently expansionary monetary policy. Central banks will be less active, so FX volatilities will remain low, even if the EURUSD sideways movement is unlikely to last. In the short term, we continue to see recovery potential in EURCHF due to declining recession fears. In the long term, however, downward pressure from the ECB's continued ultra- expansionary monetary policy is likely to increase again.
The franc benefitted from intermittent late-cycle fatigue this year, more so, we believe, than Brexit- related safe-haven activity. CHF gained just shy of 2% vs EUR and held its own vs USD. It lagged JPY slightly, reflecting JPY’s much cheaper valuation.
CHF remains anti-cyclical and prospects for the global economy will be key again in 2020. We remain more in the later than mid-cycle camp, and expect this to bias CHF higher, albeit gains will be modest unless the global economy really does hit the wall.
1) Add short USDCHF in cash to existing long CHFJPY seagull: The existing CHFJPY seagull is a soft play on European reflation that can also work in a modest risk-off climate due to Switzerland's superior BoP position. This has also managed to benefit from outsized JPY selling from Brexit- and trade-related developments this week, while CHF has been comparatively resilient.
2) USDCHF spot longs: We add a long CHF vs USD in cash to capitalize on the higher bar from the Fed to hike underscoring CHF’s natural inclination to perform in low-yielding environments, again capturing the effects of Switzerland’s difficulties recycling its large current account surplus. It should also benefit from any signs of a cyclical turn in Europe.
3) USDCHF FVAs: USDCHF 3M3M fwd vols are at multi year lows, hence FVAs are attractive for owning event risk on the Democratic candidate selection process. As described above, there’s some conflicting signals in the polls, which may prompt something of a surprise outcome in the early- February bellwether states. The FVA provides a vehicle to capture any outcomes that catches the market off-guard.
4) Relative trades (Stay long an AUDCHF put spread financed via an AUDNZD put): This is a part hedge to pro-growth trades which shouldn't necessarily lose money if Euro area growth does step up. AUDCHF is vulnerable to RBA QE, while AUDNZD will be supported by pressure on the RBNZ to match the RBA to maintain competitiveness.
Trade tips:
1) Long a bullish 3M CHFJPY seagull (long a 111.50/114.50 call spread vs short a 106 put). Cost 12.8bp CHF, (spot 109.27). Marked at 47bps.
2) Sell USDCHF in cash at 0.983. Stop at 1.003.
3) Buy 3Mx3M USDCHF FVA @5.55/5.85 indicative. Spot ref 0.9966. Marked at 5.63 vol pts.
4) Long a 6M AUDCHF 0.66 / 0.64 put spread, short a 6M AUDNZD 1.03 put. Cost 38bp AUD (0.6769 & 1.0559). Marked at -8bps. Courtesy: JPM
