This year has seen significant downside move in the Swiss Franc (CHF), after major declines in volatility for the second half of last year. Valuation flatlines in currency pairs like the EUR/CHF are rarely seen, and tend to be preceded by substantial spikes in volatility once market indecision abates (classic consolidation price behavior). The first few months of 2013 represent an excellent example of this type of price activity,with prices rising from Swiss National Bank [SNB] imposed price floor at 1.20 to highs well above 1.25 in a matter of weeks.
Since then, prices have shown downside corrections, but further strength in the CHF is increasingly unlikely as the SNB reiterated its plans to defend this price floor at its March 21, monetary policy meeting. As an explanation for this policy stance, the SNB comments suggested that weakness in the country's important export sector has been artificially created by an inappropriately overvalued Swiss currency (making export products more expensive for foreign customers).
The Focus on Swiss Export Markets
In the chart below, we can see that this policy stance has had a positive effect on Swiss export markets, with total out rising above historical trend potential into the end of 2012.
Subsequent declines in January, however, have kept the central bank on guard, and the March policy meeting confirms that the central bank is ready to intervene in currency markets if the CHF rises back above 1.20 against the euro. Europe is the largest destination for Swiss export products, so it is not surprising to see most of the focus placed on the EUR/CHF currency pair (rather than in the USD/CHF, or CHF/JPY). Additional policy comments from the March meeting showed that the SNB is positioning for slower growth in 2013, and this creates an additional need for maintaining steady currency values.
Economic Data Supports SNB Policy Stance
All of this information is particularly useful for long-term currency investments, as this essentially suggests there is limited upside in the Swiss currency. The SNB maintains its three-month LIBOR target at 0% to 0.25% (for the seventh straight quarter), and most of the latest comments indicate a dovish bias from the central bank for the medium term. The central bank's GDP forecasts show an expected rise of 1% to 1.5% for 2013, which would show a modest increase from the 1% that was seen in 2012 (based on preliminary estimates).
Consumer price forecasts suggest that negative inflation will be seen this year (with rates of -0.2%), with normalization starting to come in 2014 and 2015 (with consumer price forecasts of 0.2% and 0.5%, respectively).
Reiterating the Commitment to Intervention
With respect to defending the price floor, the SNB has made it clear that it intends to purchase foreign currencies in unlimited quantities if markets attempt to again pierce the 1.20 EUR/CHF valuation, even going so far as to say that it would not rule out "additional measures" in order to ensure that the upside rate limit remains intact.
Some investors have expressed concerns over the bank's ability to carry through on these promises but given the extreme volatility that would be encountered if the price region is violated, it remains in the best interest of both Switzerland and the eurozone to ensure that this does not happen. Extreme appreciation of the Swiss Franc would undermine price stability in the region and have detrimental effects that extend beyond its borders, so there is clear incentive for the SNB to carry through on its promises of intervention. The Swiss Franc is traditionally viewed as a safe haven currency during times of market uncertainty, and with the global growth outlook continuing to maintain a supportive footing, these external factors are unlikely to cause much of a disruption to the forecasts for a weaker CHF.
Technical Perspective: Bullish CHF Positioning Based on Policy Initiatives
From a chart perspective, buyer demand is expected to re-enter the market at 1.2280, which is an area of historical support and the 38.2% Fibonacci retracement of the rally from 1.2110. Both the 100- and 200-period Exponential Moving Averages are clustered in this area on the four-hour charts, so there is a strong confluence of technical signals that support the fundamental picture and suggest prolonged weakness in the Swiss Franc.