Will SNB allow EURCHF to break through 1.15?

Summary:

• Swiss National Bank seems to be unwilling to see EURCHF below 1.15
• Switzerland’s manufacturing PMI falls off its high implying no further GDP growth acceleration
• Net speculative positioning is the most relevant downside risk for the currency pair
• EURCHF hovers above its crucial support, a risk/reward ratio looks favourably

The Swiss franc could arguably be described as one of the most overvalued major currencies. However, in a medium term CHF’s performance depends more on risk appetite changes as well as the Swiss National Bank’s desired level than macroeconomic trends. Given that price growth in Switzerland has been kept in check over the recent months (the latest pick-up has been driven predominantly by rising import prices) the SNB is unlikely to communicate an impending shift in its policy (the target for 3-month LIBOR has been between -0.25% to -1.25% since January 2015 when the bank decided to abandon a cap on the EURCHF). In turn, some signs may suggest that the SNB could be unwilling to see the stronger franc from the current levels. In this analysis we outline the medium-term view for the EURCHF.

Looking at the levels of deposits, we can argue that the 1.15 was the intervention level in the past. Source: Bloomberg, XTB Research

Let us begin with the SNB view on the currency. Although the 1.20 cap has been long removed, the Bank is not indifferent to the exchange rate and may intervene on the market if it sees the franc as too strong. Sight deposits served the SNB as a tool to steer liquidity and therefore exert impact on money market rates as well as the domestic currency. The higher the level of sight deposits, the stronger evidence the central bank stepped in to weaken the franc. Over the recent years we have experienced several situations when the central bank may have wanted to take upward pressure off the CHF. Since the EURCHF has begun its rally in mid-2017 signs of any SNB’s FX interventions have disappeared. However, this changed when the cross stopped rising and began falling at the beginning of this year on the back of increased turmoil on financial markets. The repeated itself a few months later when the pair slumped from around 1.20 toward 1.15. In that time, the amount of sight deposits (here measured as the 4-week MA of weekly differences) rose pointing to currency interventions. Thus, the 1.15 handle might be viewed by some market participants as the line in the sand below which the SNB could not be eager to see the pair.

Swiss manufacturing PMI suggests the economy may have topped out in the first quarter. Source: Macrobond, XTB Research

There are more evident reasons to be more bearish when it comes to the outlook for the European economy. If so, growth in non-EMU economies should lose momentum as well. Moreover, the Swiss economy features a relatively high share of net exports in growth having its GDP fueled mainly by this category. Should economic conditions deteriorate, it could decrease the turnover of tradable goods hurting the Swiss economy in particular. Under these circumstances a slowdown in Switzerland could be more severe than in the Eurozone. Of course, when the level of uncertainty across financial markets picked up, the demand for the Swiss currency could increase anyway. However, having the SNB standing ready to step in so that prevent the franc from undue appreciation one may suppose that the downside could be limited.

The speculative positioning is a major source of risks for the EURCHF rebound. Source: Bloomberg, XTB Research

The fact that many market participants believe that the SNB will manage to defend 1.15 on the EURCHF has encouraged traders to bet against the Swiss currency. As a consequence, the net positioning has fallen dramatically suggesting that there are not too many traders who may yet involve in the market betting on the common currency. On the flip side, the CFTC data might be analysed differently. Namely, the number of new shorts may have yet to influence the currency which would imply some a rally on the EURCHF from the current levels. At the end, let’s take a closer look at the price chart in order to identify particularly relevant levels.

The EURCHF has been unable to move below 1.15 in a sustainable way. Taking into account that the SNB may step in to halt a continued slide one may consider a long at the market price with the initial target set at 1.17 followed by 1.1950 (slightly below the top made at 1.2000) and the stop loss order at 1.1420. Notice that the 1.15 level is localized in the neighbourhood of a 38.2% retracement of the rally begun in January 2017 and ended in April this year. Source: xStation5