EUR USD (1.2525) A mid-session upward spike in the EUR/CHF rate yesterday brought traders quickly to the conclusion that the SNB was reasserting its determination to cap the strength of its domestic currency. The CHF 1.20 intervention level has steadfastly held in recent weeks even as eurozone tensions heightened and the euro fell almost across-the-board. However, for investors who had bought the cross, relying on the SNB to provide an asymmetric payoff, this has been a particularly anxious time. Many had undoubtedly wondered whether it was really possible for a single central bank to stem the tide of euro sales given the developments in the eurozone. In addition, if the SNB subsequently diversifies its growing reserves by re-selling the acquired euros versus other currencies – dollar, sterling and yen – it drives these FX rates lower and their respective implied volatilities higher. The generally falling euro fuels the popular anxiety about the durability of the intervention level, and with it the willingness of investors to sell EUR/CHF. This is a viscous circle that the SNB is certainly desirous to prevent spiralling out of control. Versus the dollar, the euro remains on track to test 1.2485/90. Below there, we would expect a near-term move to 1.2380, but note that solid demand is not ahead of 1.2240. To the upside, supply is likely to be more aggressive, starting already at 1.2695. Hopes for any kind of stabilisation must be reserved for a break of 1.2830.
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Deutsche Bank