EUR/CHF Outlook

From the FXWW Chatroom: For most of H2 last year EURCHF was a strong contender for the title of world’s most boring currency pair. Traders took the cross off their screens as price action seemed too impenetrable and liquidity too thin to bother taking positions. Things have changed over the last couple of weeks or so with EURCHF soaring above 1.11 today and questions about the Swiss situation and SNB reaction function suddenly multiplying. What has been behind the move?The most likely trigger for franc weakness seems to have been the perception of more aggressive SNB FX intervention this month, fuelled by increasing sight deposits. Since the beginning of the year sight deposits have gone up by around CHF4.5bn while in December they dropped by around CHF0.4bn. However, it is important to note that typically sight deposits fall in December due to high year-end cash demand while the rise again in January as the cash returns. The effect could amount to a few billion CHF and mean that the seeming increase is in fact an optical illusion.

In addition, there is also the possibility of the SNB having being active in forward markets which would mean that liquidity injections would not be immediately visible in sight deposits depending on the tenors of the contracts. Both the year-end effect and potential forward activity could have distorted the numbers in Dec/Jan and hence give misleading impressions of a more aggressive central bank. In fact, when smoothing the numbers the weekly average increase seems to have been a fairly steady at CHF200-400m over the last few months.

Fundamentally there would seem little reason for the Swiss franc to weaken in an environment of heightened global risk aversion. We have long argued that while a higher EURCHF clearly make sense longer term, for such a move to occur, a multi-month period of relative global stability and monetary policy normalisation would be required. However, with the BoJ now also going into negative rates (The BoJ And The World) , further ECB easing likely and the Fed at risk of aborting lift-off, the global environment does not seem conducive to a weaker franc.Investors trying to make sense of the sudden EURCHF move have also argued that the SNB would be fully justified to become more aggressive as headline inflation at -1.3% remains one of the lowest anymore while the economic outlook is not particularly bright either. However, it is not clear why the SNB should be taking the risk of a more proactive stance while there still seems so much event risk globally. Rather, the SNB might have been intervening in a more passive way, holding levels around 1.08-1.09 or so. In any case, in the absence of more material downside pressure in EURCHF the SNB would seem unlikely to take further easing measures. (UBS)

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