FxWirePro: Swiss franc’s safe-haven nature still remains intact despite tail risks of global trade turmoil – Activate EUR/CHF short hedges

After a period of volatility, EURCHF stabilized in a narrower range over the past month. CHF performance within G10 FX is relatively mid-range over this period, but that still leaves it as second worst performing currency in this subset YTD (second only to SEK at the time of writing). CHF underperformance through mid-April was partially driven by market expectations of an eventually benign outcome on global growth on the back of global policy easing which also culminated into FX volatility grinding to the low-end of its decade-long range.

The nascent global growth recovery and the low-vol is regime is now once again being threatened by a re-emergence of a more aggressive US trade policy. While the conditions remain fluid and US-China trade negotiations are still ongoing, a further escalation of the conflict is not likely to bode well for high beta FX and on the contrary, is likely to be supportive for defensive currencies such as CHF given our view that FX markets are currently priced to more optimistic growth outcomes.

CHF is unlikely to be immune from an escalation of trade conflict which spills into broader risk sentiment. In such an event, the channel of transmission is likely to be the market re-adjusting to a lower growth outcome and pricing in more risk premia for tail risks. 

Recall that last year, CHF was among the best performing currencies globally amid the softer growth backdrop and escalating tail risks. While CHF has been less sensitive to changes in risk sentiment (as measured by equities) in comparison to say USD or JPY, CHF (negative) sensitivity to equity markets is the nonetheless the third largest globally (refer 1stchart). The beta has been stable for the past year but has shown signs of increasing in magnitude when market volatility increases (refer 2nd chart). 

The JPM projections have been modestly constructive for the trade-weighted franc in any case albeit we expected more of this strength to materialize versus a still-cyclically compromised EUR in 1H, before beginning to rotate towards USD in 2H in line with a shallow bounce in EURUSD. The targets were set at 1.12 EURCHF by mid-year and 0.98 USDCHF on a 1Y window.

Hence, on hedging grounds, we advocate initiating shorts in EURCHF futures contracts of June’19 delivery. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -15 levels (which is mildly neutral), while hourly CHF spot index was at 80 (bullish) while articulating (at 12:44 GMT).

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