The EUR/CHF (Swiss franc) exchange rate surpassed the 1.14 mark, thus being at its highest level since the SNB abandoned the floor in January 2015. However, the current EUR/CHF levels are still 5% below the former euro exchange rate floor (1.20) and 30% below the pre-crisis levels.
Chart 1: The EUR-CHF movements
The CHF recorded continuous depreciation versus the euro in the aftermath of French presidential elections in April, as concerns about political instability in the euro zone faded away. Furthermore, the recent rise in the EUR-CHF exchange rate is not so much a consequence of the CHF weakness but rather the euro strength. The latter is mainly related to the recent ECB’s optimism and market speculations that the ECB might opt for a tighter monetary policy sooner than it was initially expected.
I was actually quite bullish on the CHF at the beginning of the year (Why should you be buying the Swiss franc?). I based my view on a fact that the market still sees CHF as a safe haven asset and I also expected that some of the forthcoming risk-off events will materialize. Also, a strong built up in FX reserves in the aftermath of Trump’s presidential winning suggested that the SNB is approaching its purchasing limits and the abolishment of the exchange rate floor in January 2015 showed that the SNB is not ready for unlimited interventions.
However, markets are in a risk-on mode for quite some time now. The ’core’ yields are rising, equities are reaching record highs and market volatility has calmed down recently. The hard data of the leading economies are showing that growth is accelerating and sentiment indicators suggest that the global economic conditions will stay supportive in the months ahead.
Meanwhile, the SNB’s chairman Thomas Jordan recently stated that the SNB still considers the CHF as significantly overvalued. Furthermore, according to his words the SNB plans to maintain the interest rate differential with the euro zone and other countries in order to further weaken the CHF and boost inflation. Therefore, any downside EUR-CHF move looks pretty unlikely for now. Quite the opposite actually, the SNB might even decide to use the current market movements in order to intervene and thus weaken the CHF further at somewhat lower costs. While I do not believe that we will see an early rate hike in the euro zone, the expected announcement of the bond tapering next year, ongoing optimism on the market and SNB’s (verbal) interventions should be enough for the current EUR-CHF upward trajectory to continue. Therefore, shorting the CHF in the current market conditions seems to be a good opportunity in the risk and reward terms. However, I still think one should be careful when it comes to potential risk off occasions such as next Italian elections that will probably take place early next year.
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