EURCHF: Nostalgic Return To 1.20?

Includes: FXF
by: Max Loh


The CHF has been trading softly of late, even against the embattled USD.

The Swiss National Bank has repeatedly bemoaned the CHF strength, which has manifested itself in the form of lower import prices and inflation in the economy.

The European Central Bank and Swiss National Bank are embarking on divergent monetary policy paths, and EURCHF has broken through the 200-week moving average this week.

What is going on in the CHF? Since the Swiss National Bank removed the Swiss Franc's peg to the Euro in 2015, causing EURCHF to fall from 1.20 to 0.80 levels, the currency pair has gradually crawled upwards and is currently trading north of 1.13 levels.

Even against the embattled USD, which has traded lower against a host of other currencies due to pessimism surrounding Trump's policies, the USD was still able to put in a good shift against the CHF, with USDCHF jumping from 0.94 to 0.97 levels in a space of a week. That is a 3% move within a very short period of time.

The Swiss National Bank has repeatedly bemoaned the strength of their currency, as too strong a currency would cause import prices to fall, putting a dampener on inflation levels. An approximately 30% from 1.20 to 0.80 against the EUR certainly does count as too sharp and too sudden a move.

As seen from the 2 charts below, the Swiss economy has felt the brunt of a sharp appreciation in the CHF. Import prices have fallen sharply since 2015, and inflation levels are at anaemic levels, hovering just above 1%. The Swiss National Bank has already set its key interest rate in negative territory at -0.75%, which makes it difficult for the central bank to further cut interest rates to boost inflation levels.

The reason the Swiss National Bank had chosen to de-peg the CHF against the EUR was due to the European Central Bank launching a massive quantitative easing programme then, which would have caused the EUR to be further devalued against the CHF. That means the Swiss National Bank would have to spend more of its reserves to defend the peg at 1.20 by buying EUR, which would be expensive. As such, it made the decision to let its currency appreciate against the EUR by removing the peg.

Times have changed now. The European Central Bank is on the cusp of reducing the size of its balance sheet. In last week's meeting, the central bank, Mario Draghi appeared nonchalant about the EUR's recent strength, which members of the central bank had previously been very wary of. He also mentioned there are discussions within the committee surrounding balance sheet shrinking, which might take place as early as September.

With the European Central Bank now open to EUR appreciation, this signals a reversal from its monetary policy in 2015, when the Swiss National Bank was forced to remove the peg. The European Central Bank and Swiss National Bank are on the cusp of embarking on starkly opposite monetary policies, the former taking up a hawkish stance, while the latter a dovish one.

The policy change is manifesting itself in the EURCHF exchange rate. Technically, the currency pair has broken through the 200-week simple moving average around 1.1220 this week, and if price action were to stay above the key level, we could see EURCHF slowly creep back towards the 1.19-1.20 levels again, making a nostalgic visit to a historical site where all hell broke loose just 2 years ago.

Readers can consider going long EURCHF around 1.1250 levels, with a take profit at 1.1850 and stop loss just below 1.10. This trade idea removes exposure in the USD, a currency which has been extremely fickle and unpredictable of late, and gives traders / investors pure exposure to the monetary policy divergence between both the European Central Bank and Swiss National Bank.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.