Swissquote: central banks, not geopolitics, will be main FX drivers

Swiss bank believes ECB may embark on tightening path, initiating monetary policy convergence either side of the Atlantic

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Capital controls: Swiss National Bank may step in if franc continues to appreciate, says Rosenstreich


Geopolitical events such as the UK government’s Brexit negotiations and even the French election will play second fiddle to central bank decisions this year, despite the high level of uncertainty surrounding the broader macroeconomic environment, says Peter Rosenstreich, head of market strategy at Swissquote Bank, which won FX Week’s one- and three-month forecast tables last week.

“If you can have a Brexit, if you can have an emerging market taper tantrum, and if you can have Trump winning the White House with only the most marginal correction in equity pricing, there is something backstopping that,” says Rosenstreich.

“To us that’s monetary policy. We think that as long as monetary policy stays loose then these geopolitical macro themes are going to come and go. They are going to be a blip,” he adds.

Rosenstreich sees cable rising to 1.28 within 12 months, with some short-term volatility between 1.24 and 1.26 until the summer, largely due to the remaining sensitivities of the constantly changing Brexit news flow.

“We think the balance of the risk is pretty even,” he says. “We do believe that when we come out of the summer and we’ve heard all of it from everybody – the good and the bad – there’s going to be numbness and the reality of a soft Brexit. Then it’s going to head higher when inflation picks up higher in the UK.”

Despite increasing inflation and some rattles of tightening at the last Bank of England (BoE) meeting, Rosenstreich does not expect it to embark on a tightening path this year. He also sees the European Central Bank (ECB) beginning to tweak its loose monetary policy in the final quarter of the year and keeping the markets guessing.

They are not going to go down the same path the Fed has gone… it would be a huge mistake and I don’t think they have any intention whatsoever of doing that
Peter Rosenstreich, Swissquote Bank

“By mixing it up they’re going to keep the market slightly off-balance by tweaking different windows, different interest rates, and playing around with quantitative easing,” says Rosenstreich. “They are not going to go down the same path the Fed has gone. I think it would be a huge mistake and I don’t think they have any intention whatsoever of doing that.”

Rosenstreich points out the currency to watch is the Swiss franc, which could appreciate to levels that the Swiss National Bank (SNB) may feel compelled to act against, potentially in the form of capital controls. The franc is currently trading at 1.07 versus the euro – a level substantially lower than the 1.20 cap the central bank abandoned in January 2015.  

“If things really start heating up, the SNB is going to have to make some very difficult decisions,” he says. “Capital controls could be very real and they could do it very specifically. They’ve done it before and they could very easily do it again. A floor would be the wrong way to go.”

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