UBS analyst Thomas Flury expects EURUSD to top out at around the 1.45 level according to the latest UBS Investor’s Guide. Fed rate cut expectations are already very high and will hardly drive the currency pair going forward. But EURUSD normally falls when risk aversion leads to a reduction of carry trades. Such falls can be expected as the global financial sector will face more bad news about sub-prime losses and as year-end position cleaning approaches.
Amid higher risk aversion, USDJPY managed to fall back into our expected USDJPY trading range of 116.4 to 112.8. A further deterioration in global risk appetite could bring USDJPY to the lower band of our trading range, notes UBS analyst Dominic Schnider. The 112.8 marks our next target. Macro-wise, there is no trigger for a substantially lower USDJPY. Â Only with strong domestic news flow will the JPY be able to gain ground on a sustainable basis. This bring us to the point where we advise selling the downside potential of USDJPY below 110/109 for a premium. At these levels we like to go JPY short vs. the USD and be carry long.
Over the last few weeks, USDCHF has continued to float in a narrow band around 1.18. Giovanni Staunovo writing in the latest edition of UBS Investor’s Guide says they still expect USDCHF to stabilize at this level for now, with tops towards 1.19 and dips towards 1.16. As long as investors’ risk appetite stays high, both the CHF and the USD will remain weak. On the other side, a spike in risk aversion would be positive for both currencies.
As a result, USDCHF is not expected to move much as both currencies remain subject to similar external forces. Should the Fed again surprise markets at the end of October with a more aggressive than expected cut in the target interest rate – we expect a 25 bps cut, in line with market consensus –USDCHF would likely test new lows in the direction of 1.15.
Over the last few weeks, EURCHF has moved in unison with investors’ risk appetite. Increased risk appetite pushed EURCHF to a new all-time high at 1.6828 on October 11. Although Swiss National Bank (SNB) officials initially did not show any concern about the weak Swiss franc, SNB Chairman Roth and Vice-Chairman Hildebrand finally said that they saw upside risk to higher inflation. Roth also said the SNB will eventually hike rates further if the weak CHF leads to inflation.
Currently, we do not expect inflation in
UBS analysts think CHF weakness will persist as long as investors continue to have low risk aversion. We doubt that a further single rate hike of the SNB would spur much franc strength.
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