Mid-Week Update

May 6, 2025

This is a quick update as we move into a quiet start to the week ahead of the FOMC that shouldn’t throw too many surprises at us. I have written about the move in the TWD in this week’s ATW. This could potentially have repercussions on other markets and is certainly one of the reasons why the USD has again started to depreciate.

We have seen a move of just under 8% since the early January highs and are now back to mid-September 2024 lows. What gives?

Looking at simple US vs German 2-year differentials, would state that pretty much the entire move is not based on anticipated monetary policy divergences but the depreciation of the USD as a reverse asset.

Where can the USD go if we get a much weaker growth outlook going forward? Compared to last year, 1y1y can still double the cumulative rate cuts from here (using last year’s guide), which, all things being equal, could depreciate the USD another 4-5%.

The repatriation dynamics are strongly felt in the CHF, which has now seen 2-year SARON (OIS) reach a new low at -20 bps, following a zero inflation print and further anticipation that the SNB will potentially cut rates again into negative territory.

This is their only viable option, as the central bank is already facing a bloated balance sheet, which has started to increase again this year, likely linked to small interventions to mitigate the CHF strength. While they posted a Q1 gain thanks to their gold reserves, Q2 will likely be a big down quarter.

What now? I leave the floor to Macro D, who investigates further and presents his current trade ideas involving the Swiss Franc.