The CHF has come under heavy selling pressure against the EUR and USD in the past week. The USD has rallied on rising interest rate expectations as economic data continues to firm. While protectionist sentiment has hurt the CHF against the EUR. Switzerland has limited exposure to the United States in terms of trade. However, its small and open economy makes it extremely vulnerable to trade tensions and weakening global economy.
U.S. Treasury Secretary Steven Mnuchin, representing the U.S. trade delegation in China, has expressed optimism over tariff talks. Yet there is a clear divergence between the optimism of US trade policy internationally and President Trump's communications domestically. There is a clear risk that despite positive developments in Asia, Trump emboldened with populism zeal, fires off another random X-billion of new tariffs.
Elsewhere, the EU’s exemption from US broad tariffs of 25% on steel and 10% on aluminium was extend for another month, which indicates that rising risks as May ends. In addition, the unenthusiastic response from the European Commission is unlikely to sit well with the Trump team of Robert Lighthizer and Peter Navarro. Volatility as dropped as protectionism uncertainty has fallen, yet decelerated while risks, in our view, are only resting. Renewed worries will further pressure CHF.
The SNB concerted effort to debase the CHF via ultra-loose monetary policy is now working. With tightening bond spread in the euro-area, CHF position as a global safe-haven trades has decreased. Barring unexpected rising EU fragmentations risk and decrease in risk appetite, the ECB 'normalization' policy will like dominate currency pricing. Soft economic date is unlikely to dissuade Draghi & Company from removing extreme measure of asset purchases.
Monetary policy expectation has diminished recently but will likely increase as we head to summer and details of QE reductions are released. On the Swiss front, it is extremely unlikely the SNB will shift its defensive positions. Recent weak domestic inflation outlook and slow growth start (KoF Economic Barometers fell to 107) has given the central bank plenty of coverage to push out the first interest rate hike until late 2019. Policy divergence and sustained protectionist risk will keep CHF weak.
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