EURCHF analysis presented by Dominic Bunning – Head of European FX Research at HSBC Bank:
- “EUR-CHF has fallen quite sharply in recent weeks…
- …raising the prospect of greater SNB intervention
- The pair also looks a bit low relative to interest rate differentials, despite an equally dovish outlook”
“EUR-CHF has traded below 1.07 for the first time since August and is closing in on its lowest level since November last year. Our strategic view is aligned with further, albeit gradual, EUR-CHF downside on account of the slowing global growth cycle and the CHF’s counter-cyclical properties. However, in the short-term it looks like the pair may have fallen a bit too far, a bit too fast.
The SNB remains an active player in the CHF FX market. Despite some thoughts earlier in the year that they might be less responsive to CHF strength, recent months have seen some relatively sizable, if sporadic, gains in FX reserves (Chart 1). The SNB maintains that the CHF is highly valued and the pace of the recent move lower along with the new lows for EUR-CHF coming into play may see a stronger response by the central bank.
1. SNB’s FX intervention policy has not gone away
Meanwhile, interest rate differentials, which have been closely linked to EUR-CHF movements in the last six months, are showing some signs of dislocation from FX more recently (Chart 2). The broad monetary policy outlook appears equally dovish for both the ECB and SNB in our view. But in the short term, the relative elevation of EUR mid-term rates (we show 3y forwards below, but 5y is a similar picture) could provide a little more support for EUR-CHF.“
2. EUR-CHF may have a dropped a little too low versus rate expectations