USD & CHF: An Interesting Trade

USD: Pay no mind

Friday's US jobs report has left the short-term fate of the USD uncertain (as discussed on this blog; https://acy.com.au/en/market-news/market-analysis/mixed-messages-on-us-jobs-l-s-130552/). Initially, the positive NFP gains gained attention, but this was quickly dampened by the first decline in household employment this year and a higher US unemployment rate, reaching a one-year high. Additionally, there was only a slight decrease in average earnings, maintaining the overall downward trend in wage growth. These developments have left the market speculating about the Federal Reserve's next steps, especially considering the blackout period and the limited macroeconomic agenda this week, which provide little guidance. If the ISM services survey and factory orders negative we can expected a calm down on US markets and a ask USD. While the focus may be on the prices paid component of the ISM survey, and whether it continues to cool, a significant shift will likely be necessary to sway market expectations regarding the Fed's future actions. Unless such a shift occurs, the USD could potentially experience consolidation leading up to next week's meeting.

CHF: No getting deflated

After displaying resilience throughout May, the CHF has taken a pause, with EUR/CHF retracing a significant portion from its multi-month lows of 0.9675. The focus of domestic news has been on policymakers emphasizing that further tightening cannot be disregarded, as they are unwilling to tolerate prolonged core inflation above 2%. Last month, both headline and core CPI figures surprised on the downside, and economists surveyed by Bloomberg anticipate a continuation of this deceleration in May. If the headline and core CPI align with the consensus expectations of 2.2% and 2.0% year-on-year (YoY) respectively, recent developments may lead to the Swiss National Bank (SNB) opting for a more moderate tightening approach, with a 25 basis points (bp) rate hike in June instead of a larger 50bp move. However, ruling out further rate hikes entirely is unlikely at this stage. Overall, the CHF stands on relatively equal footing with other European currencies in terms of the remaining tightening required, while still maintaining a more favourable position in terms of short real rates. Against this backdrop, I maintain a positive outlook on the CHF in the coming months.

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