Mass closing of carry trades pushed the USDCHF pair 7% down from July peaks. The Swiss franc copied the Japanese yen, albeit on a smaller scale. Let’s discuss it and make a trading plan.
The article covers the following subjects:
Highlights and key points
- The USDCHF’s collapse is due to the closing of carry trades.
- The SNB will unlikely intervene in the Forex market, although Swiss producers demand that.
- The probability of a key rate cut in September is high.
- The USDCHF risks continuing to rally towards 0.874 and 0.884.
Weekly fundamental forecast for franc
The scales are different. The Japanese yen and the Swiss franc have been on a roller coaster ride, but the USDJPY‘s 13% dive from the July highs took our breath away, while the almost 7% fall of the USDCHF was not as impressive. However, the strengthening of the Swissie versus the euro to its highest level since the beginning of 2015 has forced Swissmem, Switzerland’s largest business lobby, to panic and demand help from the National Bank.
The carry trade market that uses the franc as a funding currency is significantly smaller than the yen’s. The Swissie was the best G10 performer last year amid active support from the SNB, which did not hesitate to use currency interventions to revalue its currency and thus limit import prices.
Conversely, the Japanese yen has been steadily falling for at least three years in a row, creating perfect conditions for carry traders.
The BoJ has long maintained an ultra-soft monetary policy, while the SNB tightened it in 2022-2023, like most of its peers, including the Fed and the ECB. However, Swiss rates remained low, which is the main requirement for a funding currency. In 2024, the SNB has already loosened monetary policy twice against a backdrop of inflation anchored in the target range of 0%-2%.
Inflation trends in Switzerland
Source: Bloomberg.
The Bank of Japan, on the contrary, took the path of monetary policy normalization. Thus, raising the overnight rate to 0.25% and reducing QE in late July resulted in winding down carry trade positions, provoking a real storm in the financial markets, called “Black Monday.” Rumors of a recession in the US economy after the release of disappointing jobs statistics added fuel to the fire.
The BoJ’s statement that it would not raise the overnight rate amid market instability and a drop in jobless claims in the States at the fastest pace in almost a year brought calm to Forex, allowing the USDCHF bulls to claw back some of their losses. JP Morgan claims that 75% of all carry trade positions were closed, which does not exclude the risk of repeated shocks, albeit on a smaller scale.
Weekly trading plan for USDCHF
The SNB will presumably refrain from currency interventions that Swissmem has called for. However, it will most likely cut its key rate for the third time this year in September amid slower inflation than its 1.5% estimate projected for the end of the third quarter. This should put pressure on the franc, and together with expectations of the Fed’s reduced monetary expansion, risks fueling a further rally of the USDCHF towards 0.874 and 0.884. My advice would be to stop selling and consider going long.
Price chart of USDCHF in real time mode
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