Best Bank Awards: UBS

As trade negotiations between the US and China intensified over the summer, risk for the Swiss franc sold off, according to Stefan Mueller, foreign exchange trader at UBS.

Mueller says the currency still holds its safe-haven status and has strengthened accordingly.

“EUR/CHF broke the lows from last year and below 1.10. During that time, Swiss National Bank sight deposits rose, suggesting that the SNB felt the need to smoothen the strengthening of CHF during that period. Eventually, with the progress in trade negotiations and the reduced risk for a ‘no-deal’ Brexit, the Swiss franc topped out and EUR/CHF found a base ahead of 1.08,” he notes.

The Swiss bank saw aggressive cuts priced into the Swiss curve at the beginning of the trade tensions, specifically on the rates side, as the market thought the SNB’s hand was getting forced again. Liquidity has been notably challenging and volatility quite high, says UBS.

Because of negative interest rates, the Swiss franc is an attractive funding currency and was used as such at the start of this year. UBS saw an unwinding of those positions as risk came under pressure.

“We saw increased hedging and trading activities from domestic and international clients, coupled with many client calls regarding the market situation,” says Mueller.

Looking at the future of the Swiss franc, he believes it will maintain its safe-haven status. He sees trade negotiations back on the table next year and a global slowdown, as well as interest rates declining further.

“I see a stronger CHF versus the USD and EUR. With the US cycle peaking and most G10 rates staying at or below zero, the Swiss franc will likely remain a favourable currency for carry trades,” adds Mueller.

One challenge faced by offering services in this currency is in executing larger transactions, the bank says.

“Minimising the market impact is essential. Naturally, we have a strong franchise in CHF, with a global footprint and a diverse spectrum of clients ranging between local corporates, wealth management clients and institutional clients. This gives opportunities to internalise and reduce market impact,” Mueller notes.

Another challenge is higher volatility combined with problematic liquidity at times, compared with major currencies such as EUR and JPY. Mueller explains: “A lot of liquidity in the Swiss franc is driven by correlation to the majors and is dependent on market stability, and thus is reduced in times of uncertainty.”

We have a strong franchise in CHF, with a global footprint and a diverse spectrum of clients… This gives opportunities to internalise and reduce market impact

Stefan Mueller, UBS

UBS was voted the winner of the Best bank for the Swiss franc category at the 2019 FX Week Best Bank Awards.

One of the milestones for the bank over the past 12 months has been a new publication, Swiss Flag, initiated by UBS Knowledge Network, its macro foreign exchange, rates, credit sales and trading commentary arm.

To offer a comprehensive round-up on the Swiss franc once a month, it gathers the best of sales and trading content from the floor and aggregates views and inputs across all trading desks, including spot, options and short-term interest rates (Stir). The publication flags themes from various client segments, such as Swiss corporates and wealth management clients.

The bank’s direct algorithmic market access offering, Orca, went live at the end of last year. UBS has seen a significant increase of client flows through this, according to Mueller.

Another highlight was the integration of its developed and emerging markets business across the FX construct, and further electronification of its business providing more transparency on pricing to a wider array of clients.

Big themes

The main domestic themes, as UBS sees them in the FX market for the next 12 months, are the Swiss franc’s safe-haven status and strength, as well as negative interest rates occupying discussions on the currency.

Globally, the themes are really the same as this year, Mueller adds: Brexit and trade tensions, as well as further interest rate cuts and quantitative easing, US presidential elections, further rate cuts in the US, increased attention to repo funding markets and higher volatility into year-end for FX swaps.

Mueller expects volumes to stabilise on current levels in the coming year, after a slight decrease in FX spot volumes and to remain constant for Stir products.

In terms of future development of its offering, UBS’s aim is to provide more sizeable liquidity in developed products, as well as transitioning into Libor replacement products as and when required by its clients.

The full list of winners of the 2019 FX Week Best Banks Awards