LONDON (Reuters) - The Swiss franc rallied to a one-month high against the euro on Wednesday as hedge funds unwound some of their negative bets against the currency and as appetite for risky assets faltered due to the intensifying unrest in Hong Kong.
A speech by U.S. President Donald Trump where he threatened to raise tariffs on China and criticised European Union trade policies before a Nov. 14 deadline to decide whether to raise tariffs on European and Japanese carmakers also boosted demand for the negative-yielding Swiss currency.
Hedge fund and banks had ramped up their bearish bets against the Swiss franc over the last two weeks on expectations a trade pact between Washington and Beijing would fuel demand for risky assets and boost carry-trades where investors borrow in cheap currencies such as the franc and yen and invest in riskier ones like the dollar and the pound.
“It feels that the market has been getting itself short Swiss franc the past 2 weeks on back of the rally in risk and there should be more downside in the euro/franc and the dollar/franc,” said a sales trader at a European bank in London.
Against the euro EURCHF=, the franc gained as much as 0.3% versus the euro to 1.0904 francs per euro, strengthening to its highest levels since Oct. 9 while it gained by a similar margin against the dollar.
The franc’s gains were also bolstered by latest weekly data which showed the Swiss central bank had loosened its grip on the currency by stepping back from its interventionist stance.
“The latest sight deposit data suggests the SNB is taking a backseat in currency intervention in the short term but that analysis must be taken with a pinch of salt,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.
Elsewhere, the New Zealand dollar provided the standout performance on Wednesday as it stood set to notch its biggest daily gain in a year after the central bank stunned investors by keeping interest rates on hold.
Hedge funds and banks had built up massive short positions in the kiwi NZD=D3 as the local dollar is known before the rate decision on bets that the conflict between Washington and Beijing would hurt the export-oriented economy's prospects.
But after two rate cuts this year, the Reserve Bank of New Zealand said it saw no urgency to ease policy again, sending the dollar up by more than 1% and short-dated bond yields and swap rates surging higher.
“Like much of the market, we had expected an RBNZ cut today,” UBS strategists said in a daily note.
“Signs of progress in U.S.-China trade talks have soothed global markets and policymakers alike,” they said expecting the local dollar to strengthen to $0.63 by end-2019.
Against a broadly firm greenback, the kiwi was up 1.3% at $0.6407, comfortably on track for its biggest daily jump since end-October 2018.
Almost all analysts had forecast a cut in the 1% benchmark rate to a record-low 0.75%. Futures markets had priced in a better-than-75% chance of a cut as slack spending and a global slowdown held New Zealand’s economic growth at a six-year low.
Broadly, the U.S. dollar remained firm against a basket of its rivals .DXY as weak risk appetite raised the greenback’s safe haven appeal.
It edged 0.1% higher at 98.41, holding just below a one-month high of 98.423 hit in the previous session, with market focus turning towards a two-day testimony by U.S. Federal Reserve chief Jerome Powell later in the day.
The British pound GBP=D3 remained broadly steady around the $1.2840 line as latest opinion polls forecast a lead for the ruling Conservative Party.
Reporting by Saikat Chatterjee; Additional reporting by Peter Stoneham; Editing by Alexandra Hudson