Since the Swiss National Bank enacted its price floor in the EUR/CHF currency pair at 1.20, long positions in that area of the market have been one of the highest probability trades in the forex markets. In fact, since these measures were implemented, the Swiss franc has only risen above the all-important 1.20 level one time. These trends essentially favor the CurrencyShares Euro Trust ETF (FXE) for long positions, when compared to the CurrencyShares Swiss Franc Trust (FXF). But the real question for forex traders is how long the "one-way ride" can last, and when we look at some of the regional headlines this week, arguments have started to surface for when these policy measures will likely come to an end.
The initial policy changes were put in place as a way of preventing inflation, supporting the outlook for export companies (which represent a large section of the economy), and stalling the valuation surge that was occurring at the time. The benchmark interest rate in Switzerland is still seen at zero, so the official policy bias remains dovish. But earlier this week, Vice President of the SNB (Jean-Pierre Danthine) gave a newspaper interview where he espoused the view that the central bank will be forced to ease up on the exchange rate ceiling seen in the Franc once the broader environment calls for higher interest rates.
If the SNB decides to remove its price floor in the EUR/CHF, we would surely see a massive surge in the value of the Franc. So, does this mean we are in store for major price reversals, and renewed weakness in the Euro relative to the Franc? Not quite. Further comments from Danthine expressed the view that interest rates (the would-be basis for removing the EUR/CHF price floor) will not likely see any increases this year -- or next year. From the central bank's perspective, the broader environment is not yet supportive enough for export companies and deflationary pressures are still present in some areas. In short, increasing rates near-term creates more potential problems than anything else.
With the SNB still holding onto its accommodative bias, long positions in the EUR/CHF should still be considered, and any dips back into the region of 1.20 should be viewed as an overwhelmingly strong "buy." If there are potential risks to this view, we would have to look to the housing market, as the current low interest rate environment has led to an overflow of cheap mortgages in Switzerland and bubble-like conditions in some areas. It has started to become clear that portions of the market are not yet in a position that is ready to adapt to rising interest rates, so it is understandable that the SNB is being vocal about its commitment to a dovish stance well into next year.
The fundamental outlook given by the SNB will continue to create high probability buying opportunities as the EUR/CHF falls to 1.20. The technical picture for FXF also supports this view, as a strongly established series of lower highs confirms the generalized downtrend. Confluences are seen here, given the proximity of the 100-week moving average, and investors should look to sell the ETF if we see prices trade near 106.60.