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Risk-Off. Shall We Go Back To The Franc?

Published 17/06/2022, 09:06

The US stocks were battered on Thursday, as the soft US data in the wake of a 75bp hike from the Federal Reserve (Fed) fueled the recession fears and triggered a heavy risk selloff.  

The Philly Fed index fell unexpectedly for the first time since spring 2020, the US weekly jobless claims rose more than expected, the building permits and housing starts disappointed, as well. 

The S&P 500 nosedived 3.25% as Nasdaq dropped more than 4%.  

The US treasury yields softened, and the dollar fell, but the US dollar is firmer this morning as a confirmation that even the set of upsetting data could hardly cheer up the Fed doves, who know that the Fed won’t do much to help before the inflation data softens. And unfortunately, inflation won’t soften until the energy prices ease significantly.  

Oil down then up. 

The barrel of US crude rebounded aggressively after hitting the $112 per barrel yesterday, as the oil bulls came back with a revenge on expectation that the Chinese recovery, the travel boom and the tight supply would keep the market bullish in the medium run. News that the US is stepping up production, and Permian oil and gas production advanced to record barely helped. 

We shall, however, see the rally lose pace into the $120pb as the recession fear dent the global demand outlook.  

Fireworks in Switzerland 

The Swiss National Bank surprised with a 50bp hike at yesterday’s monetary policy meeting and sent an important message to the market: the SNB is now shifting its focus to fight inflation, and partially abandon its battle to soften the Swiss franc

The SNB President Jordan stated that the tighter monetary policy is ‘aimed at preventing inflation from spreading more broadly to goods and services in Switzerland’ and that ‘it cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future’. That means Switzerland will say goodbye to the negative rates by the end of summer, or by fall – the latest, and the strong franc will hopefully slowdown the inflationary pressures. 

And because the goal of the SNB action is to tame inflation via a stronger currency, the franc will likely appreciate in the medium run. The question is, by how much? 

90% of SMI earnings are generated overseas and the strong franc has a clear negative implication on the Swiss corporate profits. Therefore, the Swiss policymakers will let the franc appreciate, but not by too much. As a result, the Swiss franc has certainly a limited upside potential, even with a hawkish central bank policy. In this respect, a fall below parity in the euro-franc will likely get the Swiss to sell francs to prevent the currency from getting too strong and to keep the volatility low. 

And the SNB has unlimited power when it comes to FX operations, as the central bank can print and sell as much as francs as needed.  

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