US growth to slow
Q4 should see a US slowdown: we suspect China retaliations will erode US growth. This means the tightening cycle is pretty much priced in: 80% probability of a December hike and another 0.8% of tightening over the next 12 months. This Tuesday-Wednesday meeting of the Federal Reserve’s monetary managers would have to deliver an extremely hawkish surprise to cause markets to reprice. Since the last monetary meeting, US-China trade tensions have accelerated. Risk to front-end yields are skewed to the downside (US 2-year yields elevated at 2.80%). Easing yields at the short end of the curve will push USD lower against G10 currencies. Any expression of concerns by Fed members will remove hawkishness and press front-end yields lower.
Geopolitical uncertainty keeps USD firm. News that China would withdraw from trade talks with US has fuelled fears. Combined with chaos of Brexit, rising Iran-US tensions and negative developments in Italian budget discussion, markets are risk-off, driving USD higher. The US economic improvement due to Trump fiscal stimulus, tax boost and accelerated investment spending due to trade concerns has offset the natural cyclical slowdown.
Swiss trade surplus to decline
Although Switzerland’s balance of payments increased CHF 2 billion to CHF 22 billion in Q2, we expect the trend to reverse in Q3, as the US-China trade war weighs on the franc, which has appreciated against the Euro and US dollar by -2% and -2.80% since the beginning of June. Further trade uncertainties will push the CHF higher, which disadvantages Swiss exporters.
The Swiss economy grew at 3.20% in Q2, above the historical pace of 1.90%) and the Swiss National Bank’s forecast of 2%. The country’s financial account continues to drop, with both assets and liabilities declining by CHF 50 billion and CHF 60 billion amid divestments from foreign companies due to US tax reforms. EUR/CHF is currently trading at 1.1280, expected to trade sideways.
