Despite other important G10 currencies powering higher versus the USD this morning (and also recently on the crosses), we still have a sort of love affair with the pressure point in the system which is USD/CHF. If an exit from Fed QE3 is messy, we will want to buy the CHF. If the Fed is trapped in QE3 because the exit will be messy, we will want to buy the CHF. If the Fed is forced to stay looser for longer because of Washington, we will want to buy the CHF. If there are even the smallest of question marks over how much of the better US data is dependent on QE3, we will not want to be aggressively short of the CHF above 0.9200. The USD/CHF correlation with equities was briefly positive this year – when we all thought that as the US recovers, equities would power higher, QE3 would be withdrawn and the USD would rally. Now, however, the risk is that we see the equity rally become more not less dependent on the flows generated by QE3, and this should cap gains USD/CHF. 0.9200 in USD/CHF, above or below the figure, is our new benchmark for getting a feel for the relative health of the USD.
The strong CHF trade is also less dependent on ‘risk-on’ being in vogue than the strong trade in other currencies, and that provides us with a modicum of comfort in this extremely troubling and uncertain environment. Who cares about policy settings and sustainability anymore? Over to you SNB, you can deal with the avalanche.
Read the full report: FX Daily
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