UBS analyst Thomas Flury has changed his three-month forecast for EURUSD from 1.36 to 1.38. EURUSD has risen nicely to the level of our old forecast and is now consolidating after the impressive rally. Here, the strongest support is at 1.3380. Nevertheless, European data are continuing to deliver positive surprises, giving the ECB more leeway to remain hawkish.
The ECB reiterated in its latest statements that vigilance is needed to protect against inflation and that the level of EUR is not a worry for the economy. In this light, investors who want to hold EUR have even more incentives to add additional EUR positions during occasional dips. This is why we expect the next significant move to be positive rather than negative. Spikes towards 1.40 are possible, even though we do not think EURUSD will be able to stabilize in this expensive territory. Instead, this would be the point where fundamentally driven investors become more USD-positive, notes the UBS analyst.
Giovanni Staunovo, a UBS analysts notes in a separate commentary that the outlook for USDCHF is for a move to 1.20 in three, six and 12 months’ time (formerly 1.18, 1.18 and 1.20 respectively). This reflects two contradictory effects: the weakness of CHF as a result of its status as a carry-funding currency in an environment of persistently low risk aversion, and near-term USD weakness because of the slowing US economy. Later on, we expect the Fed to cut interest rates aggressively. This should contribute to both a pick-up in USD and an increase in volatility and risk aversion. At the same time, CHF will benefit from this situation as investors look for safe-haven currencies. We therefore expect USDCHF to hover around 1.20 for the next 12 months, notes the UBS analyst.
UBS are updating their EURCHF forecast to reflect the current risk-loving environment. “We expect EURCHF to be 1.66, 1.63 and 1.56 in 3, 6 and 12 months, respectively. While we see the Swiss franc weaker than previously anticipated in the short term, in the long run CHF should still benefit from the slowing US economy, the resulting increase in risk aversion and strong fundamentals.
After Swiss National Bank (SNB) President Roth said CHF’s safe haven status was over, EURCHF reached an all-time high at 1.6614. That same day, producer and import prices were above expectations and EURCHF moved down to 1.655. Although it is unclear to what extent higher prices are a result of the weak CHF, a minority of market participants expect more aggressive monetary policy to counter inflationary risks. The hawkish comments from SNB officials Roth and Jordan also helped EURCHF to fall toward 1.65.
On USDJPY, UBS analysts state that with positive high frequency data out of the US, the pair may break above January’s high of 122.19 and advise investors to remain JPY-defensive and wait for the technical signal for a stronger JPY to arise.
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