Franc: dark horse in Forex. Forecast as of 29.12.2021

In 2015, the Swiss franc was the best Forex performer, overtaking even the rapidly strengthening US dollar driven by a Fed rate hike expectations. In 2021, franc lost ground to greenback, however, in 2022, Swissy wants to take revenge. Let us discuss the Forex outlook and make up a trading plan for EURCHF, USDCHF and CHFJPY.

Fundamental Swiss franc forecast for a year

Although the Swiss franc ends 2021 in the middle of the G10 currencies’ performance list, the CHF has proved to be a clear leader during the last three months of the year. In 2022 it is considered a dark horse, a currency that can easily surprise the market. As it was in 2015, when Swissy took the lead thanks to the cancellation of the lower limit for the EURCHF pair at 1.2 by the SNB.

Sharp movements in Forex exchange rates, including trend reversals, are often associated with a change in the outlook of central banks. For example, in June, the Fed’s abandonment of its policy of patience broke the EURUSD uptrend. At the end of 2021, there were signs that the SNB would no longer adhere to a policy of weakening its currency. All because of the change in the inflationary regime, which even the Fed admits. The Fed intends to concentrate all energies on fighting high prices.

CPI in Switzerland in November reached 1.5%, the highest since spring 2010. At that time, the main interest rate was 0.25%, which is 50 bps higher than now.

Dynamics of SNB interest rate and inflation in Switzerland

Source: Trading Economics.

The franc strengthening may seem to the SNB as a reasonable way to slow down inflation. The regulator will abandon verbal and foreign exchange interventions and, most likely, will stop adhering to the mantra “let the ECB go ahead”.

Christine Lagarde and her colleagues find themselves in a complicated situation when record-high consumer prices of 4.9% reduce the population’s purchasing power and slow down the eurozone’s GDP. According to Allianz, the economic outlook for the monetary union is declining as the forecast for inflation rises. The consensus estimate of experts interviewed by the Financial Times suggests that the CPI in 2022 will grow to 2.7%, slightly lower than the ECB’s forecast.

While Christine Lagarde will doubt whether it is worth tapering QE ahead of time, the rise in the overnight rate in Switzerland could push the SNB to tighten monetary policy. Thomas Jordan noted that it is extremely important that SARON be at the regulator’s base rate level.

Dynamics of the overnight rate in Switzerland

Source: Bloomberg.

Political and epidemiological risks can help the franc along with the SNB’s reluctance to wait for the ECB to take the first step. The strengthening of Swissy in the fourth quarter coincided with another wave of COVID-19 in Europe. The pandemic, Brexit and the French presidential election can force investors to seek safe havens to preserve their own capital.

EURCHF, USDCHF and CHFJPY trading plan for a year 

Thus, the change in the SNB’s outlook, the risks that it will begin to normalize monetary policy earlier than the ECB, as well as the high demand for CHF amid growing political and other risks in Europe, allow me not to change the EURCHF short trades entered at level 1.045. The targets for the pair’s downward movement are still levels 1.033 and 1.026. CHFJPY purchases in the first half of 2022 and USDCHF sales in the second half of the year will look quite interesting.

     

 

  

Price chart of EURCHF in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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