Swiss franc eases in risk-off
After falling to a 13-month last Friday, EUR/CHF rose 1% yesterday and continued to grind higher this morning amid improving risk sentiment. Indeed, risk aversion has decreased substantially lately amid positive development in the UK. Brexit concerns eased after Michel Barnier, the European Union’s chief Brexit negotiator, said it is realistic to expect a Brexit deal within the next six or eight weeks. Consequently, the pound surged 1.30 against the greenback, while GBP/CHF added 1.80% to 1.2740.
Nevertheless, the ongoing trade war between the US and China will keep investors on their toes as Donald Trump warned he was ready to roll out tariffs on $267 billion worth of Chinese exports to the US. For now, it seems that market participants are too not worried as risky assets recovered in the European morning. EM currencies were better bid, the Japanese yen, the Swiss franc and the US dollar slid, while the euro and high quality commodity currencies extended gains.
Given the high uncertainty surrounding the outcome of the US-China trade war, caution is still warranted. Chances are good this risk rally will be short-lived.
Pound up on Brexit optimism
Brexit continues to grab attention: still unsolved are the customs union and the Irish border. A pound rally remains driven by talk, thus driving currency volatility higher. For now the trend is positive, with the pound bouncing back from its August low as the EU signalled an imminent deal, a change from prior discussions in July. Although the interpretation is that the EU is becoming more conciliatory, we see no real revelation. Indeed, the timetable for a deal is still 18 October 2018, period during which the EU will have to ratify the deal before official Brexit day on 29 March 2019.
We remain sceptical that current GBP relief will be sustainable, as both sides are likely to stick on important details. We also expect the Bank of England’s meeting this Thursday to be a non-event. The central bank already increased its bank rate 0.75% six weeks ago. Little has changed since then. GBP/USD currently trades at 1.3065, bouncing from its mid-August low, heading along 1.31 in the short-term.
