The EUR/CHF cross has traded in a wide range around Chf1.2100 in recent sessions, buoyed by market expectations that the Swiss National Bank may announce new easing measures at this Thursday’s quarterly meeting.
Depending upon what the SNB says or does, the cross could see some fast-paced trading action later in the week, analysts said.
Euro-Swiss held at Chf1.2102 Monday afternoon, in the middle of a Chf1.20884 to Chf1.21131 range
The cross bottomed at a 21-month low around Chf1.2045 Sept. 4 and rose subsequently to a high near Chf1.2119 Sept. 10, driven by both euro profit-taking and SNB easing speculation.
A push above last week’s highs, if followed by a move above the 55-day moving average, currently at Chf1.21232, would suggest scope for a further rally, even if short-lived given current bearish euro sentiment, and a retest of the August 5 peaks near Chf1.21774.
On the flipside, a break below last Friday’s lows near Chf1.20834 would target a retest of recent lows and then the SNB floor at Chf1.2000.
The recent sell-off in the cross had less to do with geopolitical concerns, which often prompt Swiss franc buying, and more to do with shifting fundamentals regarding the euro, said strategists at JP Morgan.
Falling eurozone yields “and the failure of the SNB to match negative ECB rates in June, has been such that CHF now enjoys positive carry at the very front-end of the curve,” they said.
In addition, “The compression in multi-year forward points reduces the cost to Swiss participants of hedging FX exposure back into CHF; it could also incentivize accelerated unwinding of the outstanding stock of legacy CHF shorts, particularly the stock of CHF-mortgages outside of Switzerland,” they said.
On this week’s SNB decision, a failure to cut would likely mean a test of the Chf1.20 floor.
Conversely, “should the SNB cut, we would raise our forecasts for EUR/CHF for a couple of quarters, albeit still retain a longer-term downward trajectory for the cross,” the strategists said.
As for alternatives, SNB jawboning has worked in the past and may again going forward, even if a temporary patch, analysts said.
The euro was threatening the CHF1.20 floor last week when Swiss official comments indicated that the central bank would not rule out the adoption of negative interest rates, noted analysts at Brown Brothers Harriman.
In remarks to the Wall Street Journal Sept. 10, Thomas Moser, an alternate member of the SNB, said that negative Swiss rates remained an option for the central bank, adding, “We always said we would use it if needed.”
The euro-Swiss cross edged up subsequently, “which seems to reduce the risk of negative rates this week,” BBH said.
“The SNB successfully got the market to do the heavy lifting with inexpensive verbal intervention,” the analysts said.
“Nevertheless, given that deflation forces continue to grip the Swiss economy, and the pressure on the euro has intensified, the risk of negative Swiss rates still seems like a potent and credible threat,” they said.
BBH noted that that the EuroSwiss futures contracts (3-month CHF interest rates) imply negative rates for the next two years.
Market players overall looked for the SNB to take a cautious stance.
UBS strategists maintained that “economic indicators may support the case for further monetary easing while EURCHF continues to trade close to 1.20.”
“We expect that the SNB will be reactive rather than proactive and will prefer to wait and see if pressure on the Franc is easing or not, the strategists said.
The SNB faces an “infamous trilemma” i.e. “a fixed exchange rate, free capital flows and an independent monetary policy, said Societe Generale strategists in a research note.
“A central bank cannot sustain all three conditions indefinitely, and the SNB is attempting to do just that,” they said.
“There is an argument to be made about ultra-easy monetary policy being inappropriate for Switzerland given the buoyant real estate market, but the SNB is unlikely to adjust the peg in the near-term, especially as the fight against deflation has not yet been won decisively,” the strategists said.
In the past, SNB President Thomas Jordan has mentioned negative interest rates as “a possible option,” and “this is likely to be enacted before year-end, though probably not this week in our view,” they said.
Societe Generale maintained that SNB will likely wait until after the ECB’s Asset Quality Review (AQR) is published in October 2014.
At the June 19 meeting, the SNB maintained the minimum exchange rate of Chf1.2000 for euro-Swiss and left the target range for the three-month Libor unchanged at 0.0-0.25%.
“With a three-month Libor close to zero, the minimum exchange rate continues to be the right tool to avoid an undesirable tightening of monetary conditions in the event of renewed upward pressure on the Swiss franc,” the central bank said.
“The SNB will continue to enforce the minimum exchange rate with the utmost determination. If necessary, it is prepared to purchase foreign currency in unlimited quantities for this purpose , and to take further measures as required,” the SNB said.
In addition to Thursday’s monetary policy assessment, the central bank will unveil its Quarterly Bulletin Sept. 24.