Forex – will geopolitics shuffle the deck once again ?
The Swiss National Bank (SNB) recently completed a change in its monetary policy. The turnaround began with a shift in the SNB’s interventions in the currency market. For many months, it had repeatedly sold foreign currencies with the aim not only of reducing its balance sheet but also of pushing up the franc in order to stave off imported inflation. Once inflation was back in the SNB’s comfort zone, the central bank gradually resumed its purchases of other currencies – something we had become used to throughout the long period in which interest rates were negative in Switzerland. This U-turn caused the franc to begin losing ground early this year, and that downward trend gained momentum when the SNB announced the first cut to its policy rate. The SNB thus became the first major central bank to kick off a rate cutting cycle. In so doing, it showed that inflation was no longer its primary concern and that it was time to boost the Swiss economy and particularly its export industry, which has been hit hard by the strong franc.
And this week, we learnt that export sales had declined sharply in March, particularly on watches, which were down 16% year on year. But the renewed political risks in the Near and Middle East could scupper the SNB’s plans, even if we don’t currently expect there to be a major regional escalation. The US dollar also appears to have been boosted by investors’ flight to safety. Besides these new geopolitical tensions, which we hope will be short-lived, the greenback could be pushed up by the Fed’s delay in changing its monetary policy. The likelihood of the European Central Bank (ECB) cutting rates in June is very high, but inflation has stopped falling in the States. So the Fed chair, Jerome Powell, could decide not to follow the ECB and wait for confirmation that there’s more disinflation to come. This delay in the Fed’s monetary policy easing could again widen the interest rate spread in the dollar’s favour. We therefore can’t rule out the possibility that the dollar will again start gaining ground against the euro.
Gold’s unstoppable rise
For more than three years, gold prices have fluctuated between USD 1,750 and USD 2,050 per ounce. Supply and demand have remained balanced: while central banks stockpiled gold, individual investors trimmed their positions in specialised ETFs. One factor was the freeze on Russian foreign currency reserves after the country invaded Ukraine in February 2022. That led several major central banks, including China’s, to reassess the foreign currency breakdown in their reserves and cut back on their US dollar holdings. There were few alternatives, however, and central banks started amassing large amounts of gold.
Nearly two months ago, the price of gold broke through resistance levels and hit an all-time high, fuelled in part by the Fed’s dovish message. Even though gold prices have increased sharply, sentiment indicators have recorded a more timid rise and are now just starting to reach overly bullish levels. A period of consolidation would therefore be a good thing, although we expect the price trend to remain buoyant in the months ahead.
This week's figure : USD 950bn
The Magnificent 7 – the stocks that were largely responsible for the 18-month-long rally by US stock market indexes – lost USD 950bn in market cap last week. This shows just how brutal investors’ shift to more defensive stocks has been in the run-up to these companies’ earnings reports.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
