– SNB to maintain the pressure on CHF
The USD remains well supported after stronger than expected US February retail sales data, which implies that our Q1 GDP growth projection has moved closer to 2% q/q saar from 1.5% previously. The data, along with a lukewarm Italian bond action, have triggered a break of the previous EURUSD low of 1.2955. According to our technical analyst, this opens the path to 1.2909 (retracement level) and 1.2882 (November-December) low. That said, it is the CHF that has seen the most selling pressure after the US data, with USDCHF up to around 0.9530 and EURCHF back up around 1.2345. The SNB policy announcement today will likely re-affirm the current expansionary policy stance. Recent comments from the central bank officials have also supported the notion that the commitment behind maintaining the 1.20 floor under EURCHF will remain in place for the foreseeable future. For EURCHF, peripheral stress indicators (Italy-Germany 10Y is a prime example) will remain important. After some widening, the spread now stands at 320bps, still below last week’s 345bps peak. In our view, technical factors are likely to keep Italian yields under 5%, including reduced net issuance this year and the fact that Italian banks have largely held on to their LTRO loans. Adding the fact that we have not seen wider contagion to other European bond markets, we still believe the reduction in peripheral stress will support EURCHF gains (see chart). We maintain a long EURCHF recommendation targeting 1.2800.
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BNP Paribas