The Pound-to-Swiss Franc exchange rate was lower on Wednesday but remained the best performer of the Sterling currency complex for 2021 and has been increasingly tipped for further gains later in the year, including by Goldman Sachs, Barclays, BofA Global Research, and Natwest Markets.
Pound Sterling vs. Franc
Pound Sterling was under pressure as risk currencies were swept up by a wave of losses for riskier currencies that began on Tuesday. However, GBP/CHF was still carrying a 6% gain for 2021 and could have scope to add as much as another five percent to that later this year, some forecasts suggest.
Sterling and European currencies, including the Swiss Franc, have been penalized amid hallmarks of risk aversion in other markets and as the continent’s vaccine procurement problems continue to dominate the regional news agenda.
Difficulties procuring enough vaccines have set recoveries back by months and driven Brussels to protectionism over supplies of the AstraZeneca vaccine, with the bloc’s officials openly pushing to restrict vaccine exports to Britain.
“The vast majority of the 100 million doses the UK will receive will be made either in the UK or in India,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets. “100 million doses would cover the entire adult population for a two-dose regimen.”
Europe’s vaccine lag is more problematic than those elsewhere because it’s hampering recoveries in places that were already susceptible to underperformance before the crisis and are widening the gap between growth expectations for the continent and the likes of the U.S. and UK.
The White House’s ramped-up vaccine program and Washington’s big-spending has bolstered expectations for the U.S. recovery while expectations for European growth are stagnating, which is accentuating the already comparatively low yield characteristics of continental currencies for investors who’re contemplating the year ahead.
“We think this divergence will be an important factor in G10 FX this year,” says Michael Cahill, a G10 FX strategist at Goldman Sachs. “The expected timing of policy normalization should support CAD and NOL (both components of our USD short basket) while it may eventually hold back GBP.”
Goldman Sachs has a bearish view on the Dollar and forecasts USD/CHF to remain around 0.93 this quarter before dipping to 0.92 in June.
However, the bank advocated back in February that clients buy GBP/CHF around 1.24 in response to the UK’s vaccine success and targets a move up to 1.33, which would be Sterling’s highest since late 2019.
Cahill and the Goldman team do, however, warn that Sterling could be unlikely to benefit for long from diverging investor expectations for central bank interest rates and government bond yields, as they suspect investors will be disappointed by a Bank of England (BoE) which elects to reduce its footprint in the bond market before lifting rates.
“We also think the BoE will remain on hold throughout 2021, maintaining its accommodative stance, but the BoE is not likely to be concerned by a strengthening GBP, in our view,” says Marvin Barth, head of FX strategy at Barclays. “USD remains king of the beasts, but its valuation limits its ability to rise; commodity G10 and GBP lead in growth and the EUR lags; JPY and CHF are likely to underperform as global growth accelerates.”