CHF Strength Not all About Risk Aversion
Despite its widely projected demises, the CHF has appreciatedsignificantly for most of the year. Serious escalation in geopolitical riskfrom the Ukraine and financial contagion risk emanating from Chaori Solardefault has fueled demand for safe-haven currencies including the CHF.Yet CHF strength is not all about risk aversion as USDCHF has been in abearish trend since July 2013.
Swiss economic activity continues to show dynamic growth. Recentreports show healthy domestic spending, vigorous construction sector,and record trade surplus due to the recovering European economy. TheSNB persistently argue that the CHF remains overvalued and the 1.200EURCHF floor remains “indispensable” to policy strategy. The steadydeprecation of EURCHF and renewed evidence that Swiss deflation hasreturned, are encouraging speculation that the SNB might take additionalsteps to devalue the currency. Possible action includes increasing theminimum exchange rate to 1.2500, tax on CHF deposits and/or shiftingthe lower bound negative in the 3m libor target rate.
However we are unconvinced the SNB will act outside defending existingpolicy. This week’s ECB’s surprise decision to hold back from ease policyand a fairly optimistic Draghi press conference has further strengthen theEUR, helping to reduce pressure on the EURCHF (key concern of theSNB). SNB’s prolonged ultra-loose monetary policy is increasinglyinflating the already frothy property market. Adding fears that new actionwill only further expand the real estate bubble. And finally, Swiss businesshave held up surprisingly well to the strong CHF, making the rational tofurther expansion of the SNB balance sheet difficult to justify. With weakerUS data, pushing off Fed tightening, USDCHF specifically, should headlower. In the longer term we anticipate inflation pressures will builddemand for CHF to endure generating doubts as to how long the SNBcan carry on following such a loose monetary policy.
Read the full report: FX Research
MIG Bank