USDCHF Retreats on US Recession Fears? :: InvestMacro

by ForexTime

Market chaos prevailed throughout the first half of 2022. Bond yields, oil prices and the US dollar rose to levels not seen in more than a decade, while the S&P 500 index experienced its worst first half of the year since 1970.

But this does not mean that market volatility is now over and over.

Markets are set to remain volatile as we enter the first full trading week of July, with recession fears still clouding the broader sentiment.

For the week ahead, the US non-farm payrolls report is set to highlight a shorter week of holiday for US markets, amid scheduled global data releases and events:

Monday 4th July

  • Australian dollar: a gauge of inflation for the month of June in Australia
  • EUR: German trade data in May
  • Swiss Franc: Inflation in Switzerland in June
  • CAD: Canada Manufacturing PMI for June
  • US markets closed for Independence Day

Tuesday 5 July

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  • CNH: China June Caixin Services PMI
  • Australian dollar: RBA interest rate decision
  • EUR: Eurozone Services PMI for June
  • US Dollar: US Factory and Durable Goods Orders

Wednesday 6th July

  • Sterling: two speeches by Hugh Bell, Chief Economist at the Bank of England, and Deputy Governor John Cunliffe
  • EUR: Eurozone Retail Sales for May, Factory Orders in Germany for May
  • US dollar: minutes from the Federal Open Market CommitteeJune PMI Services

Thursday 7 July

  • Australian dollar: Australia’s trade balance
  • EUR: ECB meeting minutes, ECB Governing Council members’ speeches, Germany’s industrial production for May
  • US Dollar: US Weekly Unemployment Claims
  • US Crude: EIA Weekly Inventories of US Crude
  • US Dollar: Federal Reserve Speaks – Federal Reserve Governor Christopher Waller, St. Louis Fed President James Bullard

Friday July 8

  • Canadian dollar: Unemployment rate in Canada for the month of June
  • US dollar: United States June non-farm payroll

The ‘r’ (stagnation) is set to continue to dominate market talk in the latter half of the year as the Federal Reserve raises interest rates in order to rein in multi-decade inflation.

Fed Chair Jerome Powell argued that more jobless Americans may be needed to eventually cool inflation to the Fed’s 2% target (the US CPI in May came in at 8.6% – the highest level since December 1981).

What do the markets expect for the upcoming US jobs report?

The median estimate by economists for the US non-farm payrolls report for next June:

  • Unemployment rate: 3.6%
  • Added jobs: 250,000 (which is the lowest job growth in the US since 2019).

Ultimately, US central bank policymakers aim to destroy demand, with the unemployment rate expected to rise to 4.1% at the end of 2024 – a forecast that some market segments believe remains too optimistic.

Why is the Swiss franc strengthening?

The Swiss franc is the only G10 currency to make progress against the US dollar in June, as the dollar fell against the Swiss franc by 0.46% last month. The Swiss Franc also posted a monthly advance in June against all of its G10 peers.

Besides being widely considered a safe-haven currency, the strength of the Swiss franc was recently fueled by the Swiss National Bank’s hawkish surprise in June. The central bank unexpectedly raised interest rates by 50 basis points – its first hike in 15 years, while signaling more increases ahead.

Switzerland’s June CPI release on Monday may also spur further gains for the Swiss franc, especially if the CPI reading comes in above the estimated 3.1% figure, which would be the highest since July 2008.

Recession fears may fuel demand for the Swiss franc as a safe haven

Going back to the headline-grabbing non-farm payrolls report, if the US jobs market continues to show signs of decline, either via an unemployment rate above 3.6%, or below 250K of key non-farm payroll numbers, it could heighten expectations that The world’s largest economy is set to go into recession sometime in the latter part of 2023.

More risk aversion could lower US Treasury yields weakening the US dollar, thus potentially allowing the Swiss Franc – the traditional safe-haven – to strengthen instead.

USDCHF: breaks the support of the 100-day simple moving average?

Looking at the charts, USDCHF has found support at the 100-day SMA on two occasions over the past three months.

Another wave of risk aversion, especially amid mounting US recession fears, could see USDCHF break below this key support level to return to its mid-March peak at 0.946.

Although, of course, the upbeat surprise from the FOMC midweek meeting minutes from its June meeting, when the Fed launched a massive 75 basis point hike, could undermine the case for a weaker USDCHF.

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