Interest Rates Drive EUR/CHF

Feb.10.11 | About: CurrencyShares Swiss (FXF)

The euro came under renewed pressure today as spreads on Portuguese debt widened versus its German counterparts. The rise in spreads may have been caused by renewed fiscal worries in the euro zone. However, deflationary pressures in Switzerland may prevent the SNB from raising interest rates, driving the EUR/CHF higher.

Yesterday and today, Dow Jones and the Financial Times reported the ECB has renewed its sovereign bond purchases today in order to support European debentures.

Tensions in the euro zone have fallen dramatically since the height of the Greek debt crisis over the spring. The same can be said for the rise in pressures from the Irish banking crisis during the fall. To counter these tensions, the ECB announced a controversial bond buying program. Since an end to these tensions, the ECB has not been active in the markets. However, according to Dow Jones and the Financial Times, the ECB has once again resumed its purchases of Portugal’s sovereign bonds.

A recovery in CDS spreads as well as a reduced difference in spreads versus the European benchmark German Bunds and the Portuguese equivalent has allowed for the euro to make a dramatic recovery, rising from its lows versus the dollar and the Swiss franc.

But this situation appears to be different. As tensions rise over Portugal’s fiscal difficulties, renewed selling appears in the EUR/USD, but the EUR/CHF continues to rise.

One explanation for this may be expectations for interest rate differentials in Europe versus Switzerland. Recent comments by ECB President Trichet have increased expectations of an ECB rate hike in the near term.

Today, data from Switzerland showed lower than expected CPI with an actual decline in inflation by 0.4%. Expectations were for a decline of 0.1%. This may give the SNB an opportunity to hold rates steady at 0.25% when the bank next meets in March.

The EUR/CHF is encroaching on the 200-day moving average at 1.3200, a resistance level, which the pair has failed to breach in the past. A move above this level could take the pair to the 1.3400 level. Should the 200-day moving average hold, support comes in at 1.3070, followed by 1.2775.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.