CEE: Buy CHF/HUF, buy CHF/RON

Wed, Mar 19 2008, 14:43 GMT
by Kasper Kirkegaard, Lars Rasmussen

Danske Bank A/S


We recommend buying CHF against HUF or RON, as we continue to see fundamental support for CHF and weakness for HUF and RON. This trade is furthermore a play on increasing risk aversion. We believe that the timing is right for this trade, as the rebound in the markets since Tuesday morning can be utilised to en-ter this position.

HUF and RON look vulnerable:

  • • The newsflow over the last few weeks has not been supportive for the imbalanced Emerging Mar-kets (EM) FX markets. We have long been bearish, especially on the outlook for most EMEA cur-rencies, and we do not see any reason for turning bullish yet. Our previous FX targets have now been reached and our new FX forecasts for a number of EMEA currencies have been revised in a more bearish direction – see Flash Comment - Credit conditions worsen - new FX forecasts.

  • • Most Emerging Markets currencies were holding up very well during the global credit crisis, but it has recently become clear that this has only been a temporary situation, and a number of EM cur-rencies are now caving under the pressure. It is particularly the countries with large funding needs, like Hungary and Romania, which will continue to be under pressure. We recommend using the im-proved sentiment since Tuesday morning to enter short positions in HUF and RON.

CHF set to strengthen further

  • • The Swiss franc has been the best-performing G10 currency against both EUR and USD so far this year. Strong growth, relatively subdued price pressures, and a resurrection as a safe-haven cur-rency have brought strong support, and we expect this to continue. In the past days, we have seen a breach of our old three-month forecast in EUR/CHF of 1.56. We now expect EUR/CHF to reach 1.54 in three months – our old 12-month forecast.

  • • Although the Swiss economy is expected to slow to (or just below) trend growth this year, it re-mains strong on a relative scale. Fourth quarter GDP surprised on the upside, and while the leading indicator KOF is pointing to a slowdown, the labour market bears witness to underlying strength. The Swiss National Bank (SNB) has been on hold since the December meeting, and released a neu-tral policy assessment at its latest meeting. We expect the SNB to remain on hold, before lowering its policy rate by 25bp in Q4, when the economy has lost momentum, and the ECB has begun lower-ing rates over the summer. We thus expect movements in relative interest rates to favour CHF. More importantly, we also expect that a continued stressed global financial market, slowing global growth and high risk aversion will continue to support CHF in the months to come.

Published on  Wed, Mar 19 2008, 14:50 GMT

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