Citi Trade of the Week: Buy USD/CHF

Buy USDCHF at 0.9514, targeting a rise to 0.9650, stop loss 0.9430.

Our view:

  • The dollar is likely to remain supported going into the ISM and NFP releases. Further data strength would help to fuel expectations on earlier stimulus removal, with potential for additional unwinding of long positions in emerging market currencies to provide a broad based tailwind for USD appreciation. There has been a pattern of upward revisions to previous months, so even if the September NFP were to disappoint, an extension of this trend could mitigate fallout, reinforcing attractive risk-return in USD longs.
  • Long USDCHF remains an attractive leveraged alternative to short EURUSD. With limited downside for EURCHF, the Franc could lose ground against both EUR and USD next week. A dovish ECB could boost risk sentiment and boost EURCHF while weighing on EUR and CHF against USD. As such, we view downside risks for these currencies as increasing ahead of the October ECB meeting.
  • Citi economists and credit strategists believe that the ECB could target ABS and covered bond purchases to the tune of 400-500bn. If confirmed, the large scale asset purchases would exceed current market expectations and imply aggressive expansion of the ECB balance sheet of more than 25%. In addition, evidence of only subdued inflation in the Eurozone or further downside surprises from Swiss business sentiment indicators could weigh on EUR and CHF.

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