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  • USD/CHF dropped momentarily below the 0.8900 level in earlier trade for the first time since January 2015.
  • Broad USD weakness is the cause of the decline, with CHF holding up well despite buoyant risk appetite.

Broad USD weakness on Thursday is to blame for USD/CHF’s continued march to the south, with the pair momentarily dropping beneath 0.8900, before recovering back to current levels around 0.8910. On the day, the pair trades with losses of around 30 pips or 0.3%.

CHF performing well despite risk on markets

Risk assets have broadly performed well so far this week. Major US equity bourses are broadly higher, as are crude oil markets and US bond yields. Driving risk appetite have been the typical culprits; vaccine optimism as the UK and US race towards kicking off mass vaccinations programmes later this month, US fiscal stimulus optimism as the Democrats and Republicans get talking again, as well as more stronger than expected US economic data.

USD and JPY are, unsurprisingly, performing badly under such conditions and sit at the bottom of the G10 performance table for the week so far. One might expect the CHF to be sat right there at the bottom of the G10 table alongside its fellow safe-haven currencies, but this has not been the case this week.

In contrast to JPY (which is just 0.1% up vs USD), CHF is up nearly 1.5%. Strong data on multiple fronts appears to be helping; on Monday, Retail sales saw a decent jump in October to a YoY rat of 3.1% from 0.4% in September, the KOF Leading Indicator for November dropped less than expected to 103.5 from 106.3. On Tuesday, GDP data for Q3 came in much better than expected (7.2% QoQ vs expectations for 5.9%), as did PMI, coming in at 55.2 in November vs expectations for a drop to 51.3 from 52.3.

Meanwhile, the country remained in price deflation, with the YoY rate of price growth in November coming in at -0.7% versus expectations for a price drop of 0.5%. While this might be considered a negative (as softer than expected inflation often precedes dovish central bank action), it should be noted that the SNB is largely impotent at this point, with interest rates deeply in negative territory and already conducting FX intervention to attempt to weaken CHF.

Essentially that means that markets lack confidence in the SNB’s ability to get inflation back to its target. Remember that deflation actually means that the value of money is rising over time, so a lack of confidence in the SNB’s ability to prevent the value of CHF to continue rising over time might be the factor helping CHF outperform this week.

USD/CHF has clear air to the downside

USD/CHF is trading at levels last seen in the weeks after the removal of the 1.20 EUR/CHF peg (CHF saw extreme volatility following the removal of the peg, with USD/CHF dropping to 0.8300 from over 1.00 before reversing pretty much the entire move). Having dropped below 0.8900 this week, the door has been opened for a steady grind back towards those 2015 0.8300 lows over the coming months (or even years), given the lack of any significant levels of support in the interim.