Swiss National Bank (SNB) might engage in a prolonged monetary easing cycle due to the unexpected slowdown in Switzerland’s inflation and the strength of the Swiss franc, as per a report by Gavekal Research.

Inflation in Switzerland fell to 1.1% year-on-year in August, down from 1.3% in July and below the anticipated 1.2%. This development suggests that third-quarter inflation will be significantly lower than the SNB’s projected 1.5%.

The SNB had previously allowed the franc to appreciate to combat imported inflation during the global inflation surge of 2022-23.

However, with inflation now below the SNB’s target and the global inflationary trend receding, concerns are rising that this strategy may harm exporters and push the economy towards a deflationary cycle.

From January to May, the Swiss franc’s nominal effective exchange rate decreased by 6%, but this trend reversed over the past three months, with all losses being negated.

As a result, the franc’s real effective exchange rate has reached a cyclical peak, indicating a loss of international competitiveness.

The strong Swiss franc’s impact is evident in the inflationary contribution from domestic and imported goods.

The contribution from domestic goods has remained stable at about 1.5 percentage points, while the contribution from imported goods has been negative for over a year, reaching a new cyclical high of -0.4 percentage points in August.

Swiss exporters are feeling the pressure from the franc’s strength. The country’s largest manufacturing lobby group has called on the SNB to provide relief, as members struggle to compete in foreign markets.

Consequently, the SNB has already reduced the policy rate twice, from 1.75% to 1.25%, and further cuts below 1% are anticipated.

The SNB may also increase its foreign exchange purchases to counteract the franc’s appreciation. Although it only became a net buyer of foreign currency in the first quarter of 2024, with CHF800 million in purchases, there is potential for a significant ramp-up in activity given the historical quarterly average of CHF13 billion in purchases between 2011 and 2021.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

UBS advised investors to sell any potential short-term gains in the US dollar, adopting a more bearish stance on the currency for the medium term. The firm anticipates a possible corrective rebound in September, particularly if the Federal Reserve’s hesitancy to implement rate cuts greater than 25 basis points aligns with the seasonal trend of the US dollar outperforming during this month.

The current market positioning data indicates that the fast money shorts against the dollar are predominantly in the Euro (EUR) and British Pound (GBP), with both currencies potentially vulnerable in the near term. However, UBS views the GBP as a buy on dips, citing a more supportive domestic rates outlook and historical patterns of a strong recovery in sterling from late October to early November.

In contrast, the Japanese Yen (JPY) positioning is relatively neutral, suggesting the unwinding of short-term yen-funded carry trades. The Yen is also gaining from the return of its inverse correlation with equities, which has elevated it to one of the top performers in the G10 currencies.

Moreover, the Swiss Franc (CHF) has performed well and, without significant intervention from the Swiss National Bank (SNB), is expected to remain supported as residual franc shorts are covered. UBS has set a target for at 0.93.

The firm’s updated cross-border mergers and acquisitions tracker reveals a deal balance that is most negative for the Euro (EUR), Australian Dollar (AUD), and Swedish Krona (SEK), but positive for the GBP and JPY. For Australia, the tracker indicates a moderation in the rising trend of the Foreign Direct Investment (FDI) balance, which has reached a 12-month surplus of 2.1% of GDP in the second quarter, the highest since pre-Covid times. This is supported by strong demand for Australian fixed income, which is helping to offset a widening current account deficit.

UBS notes that Australian goods export volumes have remained stable, suggesting that the worsening trade balance is due to falling commodity export prices and rising import volumes. However, they believe the impact on the AUD may be limited as the currency did not significantly appreciate during the post-Covid commodity price surge, and the increase in imports may reflect strong domestic demand, which is why UBS maintains a constructive outlook on the AUD.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Investing.com — Despite recent weakness, analysts at BCA Research in a note dated Monday assert that the remains resilient and is expected to rebound in the coming months. 

The global economic landscape, characterized by a downturn in manufacturing and increasing caution in financial markets, sets the stage for the dollar’s recovery.

The greenback may be down, but according to BCA Research, it is far from being out of the game.

In 2024, global financial markets have seen the US dollar lose some ground as the broader economic environment has been clouded by uncertainty. 

Global manufacturing, which had briefly stabilized earlier in the year, has entered a renewed contraction phase. This relapse is accompanied by a weakness in oil and prices, key indicators of global economic activity. 

Additionally, various segments of global risk assets have failed to break above their previous highs, signaling deteriorating global growth conditions.

Moreover, liquidity conditions are tightening. BCA Research notes that global dollar liquidity, defined as the sum of the US monetary base and securities held in custody by the Federal Reserve for foreign officials and international accounts, is declining. 

This factor has contributed to the current decline in the dollar’s strength. However, this very dynamic of reduced liquidity could eventually prove to be a boon for the dollar.

“Notably, tightening global USD liquidity – calculated as the sum of US monetary base and securities held at the Fed for foreign officials and international accounts – is typically positive for the greenback,” the analysts said.

This tightening is tied to global manufacturing, which is closely correlated with dollar movements. As the global economy contracts, the US dollar often behaves countercyclically, appreciating as riskier assets suffer losses.

The current situation bears some resemblance to the early 2000s bear market. In the first phase of the 2000-2002 bear market, the US dollar appreciated as global equity markets, including emerging market (EM) stocks, sold off​. 

If this pattern repeats, the dollar could follow a similar trajectory in the coming months, gaining strength during the initial stages of the bear market.

One of the key reasons BCA Research remains positive on the US dollar is the structure of the global financial system.

The US dollar remains the dominant global reserve currency, with a majority of international transactions settled in dollars. 

Furthermore, in times of economic stress, investors often flock to the safety of US assets, which further supports the dollar.

“The broad trade-weighted US dollar has so far not broken below the lower end of its rising channel,” the analysts said. 

The currency still benefits from its role as a safe haven, which should sustain demand, especially as economic uncertainties persist globally.

Emerging market stocks and currencies are strongly correlated with global growth. BCA indicates that renewed contraction in global manufacturing will likely lead to a downturn in EM equities and currencies. 

A stronger US dollar could add to these pressures by making it more expensive for emerging markets to service their dollar-denominated debt, further hampering their growth prospects.