The USD has benefited from the positive trade developments between the US and China, which have helped ease some stagflation concerns in the US. Coupled with a still-hawkish Fed, the dollar could gain further momentum if additional trade progress is made. On the other hand, the recent de-escalation in US-China trade tensions is dampening safe haven demand, putting pressure on the CHF. Dovish signals from the SNB further reduce the franc’s attractiveness for now.

USD: A recovery ahead?

Since last November, markets has gone from fully embracing US exceptionalism to tentatively dipping their toes into an almost universal ‘sell America’ trade before, ultimately, settling back into an uneasy, ‘love-hate’ relationship with the USD. At the centre of these wild gyrations has been US President Donald Trump, whose seemingly unpredictable and, at times, whimsical policies have fuelled market volatility.

Markets are argue that the USD sentiment and long-term outlook have been damaged beyond repair by Trump’s policy uncertainty. However, that recent market reports about the USD’s ‘demise’ as a reserve currency are grossly exaggerated. So, they are also expect that Trump’s policies in the next 90 days could help repair at least some of the damage done to USD sentiment during the administration’s first 100 days.

In particular, markets expect more progress on: (1) completing deals with key US trading partners; (2) pushing through the US congress tax cuts and other fiscal stimulus measures; and (3) raising the debt ceiling before the US Treasury’s “X-date” (estimated to come in August). These policies could help restore market confidence in the US economy and encourage investors to further adjust their Fed expectations, in a boost to the USD.

The above being said, FX investors could remain sceptical that the USD could rally in the near term. The US data calendar this week is quite light with only the preliminary PMIs for May on the docket. FX investors would therefore focus on Fedspeak as well as any indications that the Trump administration has made progress on the trade deals front. In this regard, the G9 meeting of finance and economic ministers on 20-21 May could attract considerable attention. In particular, investors will be on the lookout for any signs that the US could seek a weaker USD as part of its demands. However, that a strong USD is in the US’s best interest and expect the US Treasury Secretary Scott Bessent to continue to make comments to that effect.

CHF: De-escalated in parts.

The initial market euphoria in the wake of the US and China meeting in Geneva where the two countries agreed to substantially lower their reciprocal punitive tariffs for a period of 90 days has now faded.

As a result, the safe-haven CHF was able to recoup some lost ground vs the USD and EUR in recent days. Looking ahead, it remains to be seen whether the trade truce could ultimately pave the way for securing a durable trade agreement, while markets may still have in mind the fact that the 2018 trade deal between the two countries quickly unravelled leading to extra tariffs for nearly two years. It would thus take tangible evidence that the global trade war is deescalating for good to see the CHF losing ground again in the coming weeks.

Any eventual détente in the many geopolitical hotspots could also help boost market sentiment. Against what could become a more benign global backdrop, the CHF could then be poised to reverse more comprehensively the sharp appreciation of April, a point that SNB President Martin Schlegel could again re-emphasise in his several interventions in the week ahead.

USD/CHF 4H

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