USD/CHF eyes test of annual lows in the 0.8820s

• USD/CHF is bearing down on annual lows in the 0.8820s amid broad USD weakness.
• CHF has been one of the best G10 performers in 2020 with the out-of-ammunition SNB unable to ease policy as much as other central banks.

USD/CHF has been seeing downside for most of Tuesday’s session and has recently slipped below the 0.8850 mark having been above the 0.8900 level midway through Monday’s session. USD weakness has been the driving force behind the move lower, which has seen the pair shed roughly 40 pips or about 0.4%.

Broader risk appetite is mixed/choppy, with US equities now trading in the red alongside the US dollar. Typically, the two have a negative correlation, implying that trade is today being distorted by month, quarter and year-end portfolio rebalancing flows. News that US Republican Senate Majority Leader Mitch McConnell rejected a Senate Democrat request to pass a bill that would transfer an additional $1400 to each American (bringing the total amount sent to each American in the latest batch of Covid-19 aid to $2000) by unanimous consent has hurt risk appetite (as it means no swift approval of further fiscal stimulus before the end of the year on top of the $900B already agreed) and has helped the Dollar Index recovery back above 90.00, but has done little to lift USD/CHF.

USD/CHF eyes lows of the year, what next for the pair?

USD/CHF is bearing down on annual lows set earlier in the month in the 0.8820s. If USD continues to see broad downside and the Dollar Index perhaps slips back beneath the 90.00 level and below annual lows around 89.70 then the pair is bound also to hit fresh annual lows.

As the end of 2020 rapidly approaches, it is worth recounting that the Swiss Franc is actually one of the best G10 performers on the year, up more than 9.8% against the US dollar and surpassed only by SEK. EUR is currently hot on the Swissie’s tail, up just under 9.6% on the year vs the US dollar. Perhaps unsurprisingly, the outperforming G10 currencies in 2020 have been those where central bank’s had little room to lower interest rates any further from their pre-Covid-19 levels.

Indeed, while the Fed axed rates from 1.5-1.75% to 0.0-0.25%, the SNB kept rates at -0.75%, the ECB at -0.5% and the Riksbank at 0.0%. Thus, USD saw the largest erosion of its rate advantage versus these currencies that the likes of AUD, NZD, CAD, NOK and even GBP. JPY is of course the exception and sits in the middle of the G10 FX performance table for 2020 despite no rate cuts from the BoJ.

Looking into 2021 for the Swiss Franc, SNB policy is expected to remain hyper dovish despite the US designation of Switzerland as an FX manipulator. But given that the central bank has already practically reached the limits of its power, selling CHFs in exchange for EURs and USDs remains its only feasible means of hurting the Swiss Franc.

With most expecting further downside for the dollar in 2021, it seems as though there is little the SNB will be able to do to stem the tide of CHF strength (versus USD anyway). As long as the rate of CHF appreciation doesn’t drastically outstrip that of EUR (Switzerland’s main export destination), then Swiss exports ought not to have too much cause for panic, and with 2021 expected to be a risk on year, the likelihood of safe-haven CHF outperformance vs EUR seems slim.