With Europe battling fiscal fragility, the US facing valuation risks, and China confronting disinflation, the Swiss franc may again prove resilient. History suggests that when rates and growth both roll over, the dollar eventually follows — though timing remains uncertain, Société Générale's FX analyst Kit Juckes reports.

USD range-bound, CHF gains appeal

"How much history tells us about the future is debatable, but I find it useful to benchmark similar events. The 2023 regional bank crisis is a guide to the current woes of the sector, even if we also have to take into consideration the growth of the private credit market and the tightness of corporate bond spreads. Quarterly US GDP growth in 2023 of 2.9%, 2.5% 4.7% and 3.4% tells us not to overstate the “crisis, even though the US economy is slowing, rates are coming down, and this week’s September US CPI release is expected to show a 0.4% m/m headline increase, and annual inflation of 3.1% on both headline and core measures. Which won’t help real spending."

"Slowing growth and elevated equity valuations threaten either a 2011-style slowdown (2 non-consecutive quarters of falling GDP, 1.6% growth overall) or a mini-recession like 2001 (2 non-consecutive quarters of falling GDP after subsequent revisions, 1% growth overall. The Fed cut rates from 6 ½% to 1% from 2001 to 2003, and after peaking in 2001, the DXY fell by 40% over the coming 7 years. In 2011 the Fed merely kept rates anchored, and while the dollar fell in H1 2011 it ended the year unchanged before embarking on the 55% rally which saw it peak in 2022."

"If the US valuations are justifiable highly and US economic superiority remains unchallenged, rates will not fall far and we are in for a protracted period of range-bound exchange rates. But if concerns about inflation, growth, asset valuations and market froth tip the scales and send the economy towards a recession, then rates and the dollar can both fall further than we expect. Amidst this uncertainty, we remain in wait-and-see mode. EUR/USD is trapped in a range, but there is merit in the NOK and SEK and the safe -haven qualities of the CHF, relative to the EUR and GBP. JPY can rally if Sanae Takaichi makes it clear that is appropriate; but despite excellent fundamentals, AUD may go on struggling as long as China is locked in dispute with the US and facing chronically weak domestic demand."