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Analysis
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Short GBPCHF:
The first trade I want to discuss is short GBPCHF. I’ll run through the factors surrounding the thesis. I think you have two central banks on the opposite sides of the spectrum. The BoE is fully priced and will likely make a dovish pivot disappointing market expectations, whereas the SNB are under-priced and are just getting started on their tightening cycle. So there should be monetary divergence which takes place. Next week Thursday brings a very significant SNB meeting given the increasingly hawkish rhetoric by key SNB players as well as the large beat on inflation last week (0.9% points above target). The more clarity provided around the future rate path should help provide an upward drift to CHF. The SNB have also been scaling back their margin FX intervention, allowing CHF to more freely float based on fundamentals. Although, inflation is increasing, on a relative basis it’s nowhere near the UK’s, therefore the Swissie provides a much better carry/real yield profile. Sterling is more exposed to higher energy prices too. Under market duress CHF benefits from its role as a safe-haven and the pound’s high beta nature attracts plenty selling. Lastly, the perennial issue of Brexit and the opportunity for a risk premium to be discounted into sterling, especially as the UK plans to unilaterally disapply the NI protocol.
Long USDTRY:
The next trade idea I quite like is shorting the lira against the dollar. It’s a pretty simple thesis for me. The unorthodox monetary policy amongst hyperinflation (inflation at 73.5%) – Erdogan said on Monday he will continue cutting rates. The widening current account deficit looks set to worse as oil prices continue on their ascent upwards (Turkey large net oil importer). The Turkish Central Bank’s margin FX reserves to prop up the lira are dwindling. Lastly, geopolitical tensions are rising again with Greece and now Syria after the announcement of the recent invasion plans. The currency will be the outlet valve for these pressures to go through.
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