In two stages, the dollar (DXY) has rallied over 6% since late September: Initially (in October) the market moved to price in an expected Trump Presidential election victory (as the odds shifted in Trump’s favour). A Trump Presidential victory ushers in the tariffs agenda (hence the first phase of dollar strengthening).
Then post election, as it became clear that it was a Republican clean sweep, the dollar rallied again as capital flowed to the US to invest in the expected ‘pro growth’ Trump agenda. That also drove strong equity markets (i.e. reflecting that pro growth agenda), as the S&P500, Nasdaq 100, and Russell 2000 rallied 4.1%, 4.1%, and 7%, respectively (since 5th November close).
On the flip side, as the dollar has rallied, major defensive currencies like the Yen (-6.2%) and Swiss Franc (-5%) have sold off, such that on various metrics these currencies are looking attractive (below we focus on the CHF).
From a models perspective, the CHF is becoming attractive: (i) CHF is close to oversold on our market-timing model (N.B. a contrarian buy signal fig 1a), (ii) speculative CHF positioning is heavily net SHORT (near extremes seen earlier this year - fig 1a), while (iii) sentiment is mid-range, reflecting the lack of conviction among investors. This setup highlights potential CHF upside, particularly if investors switch to more defensive positioning.
Notably, this recent risk-on phase has been primarily driven by bullish US sentiment (towards equities and the dollar currency). US dollar sentiment, though, is currently at extreme (bullish) levels, while U.S. consumer confidence about the outlook for the stock market hit a 40-year high just last week (fig 1b). This heightened optimism raises the question of whether this risk-on phase is nearing exhaustion (for further analysis see our recent (Long)View on Friday “Overweight & Nervous -> Complacency Abounds” on Substack - HERE). Should sentiment begin to reverse, the Swiss Franc, should be in a favourable position (as outlined above) to act as a hedge. Timing, as always, is critical. We dig into that in our monthly Tactical Asset Allocation publication (available HERE).
Fig 1: CHF market timing model vs. CHF spot price
Fig 1a: CHF net speculative LONG/SHORT positions vs. CHF spot price
Fig 1b: US Conference Board consumer confidence - 12 month stock prices outlook
