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Swiss Franc to Fade Alongside Euro-Dollar Rally Or Risk SNB Ire and Intervention

- USD/CHF to bottom at 5-year low when EUR/USD turns.
- Or market mechanics incite EUR/CHF tumble, irking SNB.
- ING mulls SNB switch to buying USD/CHF over EUR/USD.
- In long running battle to keep EUR/CHF from falling too low.

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The Swiss Franc's rally against the Dollar will come to an end at the same time as the Euro-Dollar rate turns lower although when USD/CHF does reverse higher, it could possibly be at the instigation of the Swiss National Bank (SNB). 

Switzerland's safe-haven Franc was the second best performing currency of 2020 on Tuesday after having rallied more than 5% against the Dollar, Pound and commodity currencies while also pushing the Japanese Yen lower too. 

"A short squeeze today probably explains why EURCHF is not following EURUSD lower. Mostly, EURCHF has been a low-beta EURUSD of late. But not today," says Brent Donnelly, a spot FX trader at HSBC, referring to USD/CHF.

Such are the extent of the Franc's gains that many trade-weighted measures show the Swiss currency nearing valuation levels that are historically consistent with significant Swiss National Bank intervention in the currency market.

The SNB has held its cash rate deep in negative territory for years to fend off without success the speculative as well as safe-haven seeking flows of capital that have lifted Swiss exchange rates sharply and as a result, aided, abetted and entrenched a trend of disinflation that has served only to burnish the Franc's appeal to investors and counteract the SNB's negative rate policy.

Above: USD/CHF shown at weekly intervals alongside EUR/CHF (orange line, left axis). 

At the heart of the SNB's exchange rate conundrum is the Euro-to-Franc rate, which accommodates the largest slice of Switzerland's trade related foreign exchange, but is also effectively an amalgamation of USD/CHF and EUR/USD. 

"CHF strength against the USD could see CHF trade-weighted indices push even higher (especially since EUR/CHF hasn’t rallied much) and prompt even more intervention (SNB starts buying USD instead of EUR?). A cautious risk tone emerging from the US should also keep the CHF in demand," says Francesco Pesole, a strategist at ING

EUR/CHF reached 1.05 and its lowest level in May since a short time after the SNB abandoned its currency peg in January 2015, which led to extreme though short-lived volatility in foreign exchange markets at the time.

Losses in the above exchange rate reflect strength in the Franc that would be unwelcome at the SNB while the 1.05 level is widely seen as a threshold that would be likely to draw intervention by the bank upon any return to it. 

Above: USD/CHF shown at daily intervals alongside EUR/CHF (orange line, left axis). 

This has implications for EUR/USD and USD/CHF because if the Euro-Dollar rate falls in a sustained way then EUR/CHF would also come under sustained pressure. That's unless USD/CHF rallies at the same time.

"We have found that Switzerland’s historical stability and staunch inflation targeting might give the Franc a similar appeal to gold when inflation concerns are building," says Michael Cahill, a senior G10 FX strategist at Goldman Sachs, in a late July research note. "To reflect the better European outlook while acknowledging still-challenging cyclical factors, we are revising up our EUR/CHF forecasts to 1.08, 1.13 and 1.20 in 3, 6 and 12 months."

Many firms have revised up their Euro-to-Franc forecasts following July's EU recovery fund agreement but upgraded projections are under threat because June's broad-based Dollar decline has extended into July.

USD/CHF's July losses called a halt to an attempted rally in EUR/CHF. Furthermore, and rubbing salt into the open wounds of the SNB, are mounting expectations of a downward correction in the Euro-to-Dollar rate.

This will lift the Franc and crush EUR/CHF unless the Swiss currency also weakens against an increasingly oversold Dollar. 

Above: USD/CHF at daily intervals with EUR/USD (orange line, left axis) plotted on an inverted scale.

In a market dominated by the influence of risk appetite ,like that of 2020, a falling Euro-to-Dollar rate might appear incongruous with a rising USD/CHF rate for some observers although this may be becoming a necessity for the SNB. 

More so given that the only alternative to SNB intervention in the USD/CHF market is to prop up a EUR/USD rate that has already lifted the Eurozone's trade weighted exchange rates to multi-year highs that are also likely to be problematic for the European Central Bank (ECB)

The SNB would be less than collegiate if it subjected the ECB and Switzerland's largest trade partner to the same problem the bank is itself grappling with when, in the event of a EUR/USD downturn, it could simply alternate to buying a U.S. Dollar that's heavily oversold on many measures against many currencies.

However, and if the SNB did opt to steer clear of EUR/USD, it would have to buy a bucketload of USD/CHF to lift EUR/CHF in a falling EUR/USD market. 

"In a speech earlier this week SNB Chair Jordan pointed out that this policy along with FX intervention is “more necessary than ever,” says Jane Foley, a senior FX strategist at Rabobank in a July research note. "While there is a clear ‘currency war’ element to the SNB’s rhetoric which is counter to the mantra of G7 countries, there is little direct criticism of Jordan which is probably because the value of the CHF is clearly overvalued on many measures."


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