Rotation trade to resume and to drag the franc lower

The partial unwinding in the reflation trade in recent weeks has stopped the decline in the Swiss franc in its tracks. Having depreciated against both the US dollar and the euro since the start of this year, the franc rose against both currencies in March, which coincided with a period in which so-called value stocks once again underperformed their ‘momentum’ counterparts. Looking ahead, we expect the rotation trade to resume soon, in part because we expect long-term yields in the US to rise again, and also because we think that the vaccine-driven bouncebacks in activity may disproportionately benefit stock market sectors more sensitive to the health of the economy. Against this backdrop, we think that it will only be a matter of time before the Swiss franc resumes its gradual decline, which would be cheered by the SNB. We have pencilled in the currency falling to CHF 1.14 per euro by year-end, from CHF 1.10 at present, and to close to parity with the US dollar over the same period (from CHF 0.92 currently).