Introduction#
Goldman Sachs has recently recommended that investors consider short positions in the EUR/CHF currency pair as a strategy to protect against inflation risks linked to rising oil prices. This suggestion comes in light of increasing inflation concerns affecting various markets.
Inflation and Currency Impact#
The bank points out that higher oil prices have led to increased inflation expectations, particularly impacting currencies sensitive to inflation, especially in Europe. The Swiss Franc (CHF) is viewed as a strong candidate for protection against inflation due to the Swiss National Bank's (SNB) commitment to maintaining inflation below 2%. This approach contrasts with many other central banks in the G10, which may not be as aggressive in managing inflation.
Historical Context#
So far this year, the EUR/CHF pair has shown potential as a hedge, initially rising sharply following an intervention statement from the SNB. However, this upward movement was short-lived as growth and inflation risks in the Euro area continued to escalate. Goldman Sachs notes that the current situation bears some resemblance to 2022, when inflation surged following the onset of the Russia-Ukraine conflict. However, they caution that the current context is different, as natural gas prices have not surged to the same extent and the global economic environment is softer.
Future Outlook#
Goldman Sachs believes that if energy prices and growth risks in the Euro area remain high, the downward pressure on EUR/CHF is likely to continue. They suggest that options formats may provide effective inflation protection in this scenario. In contrast, the bank does not see the USD/CHF pair as a viable inflation hedge due to its unclear risk profile and the Dollar's relative strength against rising oil prices.