- EUR/CHF breaks below 2020 low at 1.0500
- Extreme virus responses prompt EUR slide
- Safe haven demand could add to downside
- Aggravating SNB’s exchange rate headache
- Some analysts say it’s unlikely to intervene
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The Swiss Franc was stronger ahead of the weekend in a show of resilience that helped push EUR/CHF beneath 2020’s crisis lows, although the main driver of losses was a slide in the European single currency.
The Euro was on the back foot against all but its most high beta and risk sensitive regional counterparts on Friday while Switzerland’s Franc was outperformed by only the safe-haven Japanese Yen, which towered over all comers in the currency market ahead of the weekend.
“Financial market risk aversion picked up this morning on European lockdown headlines. Austria announced a maximum 20‑day nationwide lockdown from Monday and the German health minister warned renewed lockdown measures cannot be ruled out as the country faces a national Covid emergency. USD rallied to near recent highs except against the safe haven JPY and CHF. Bonds are up especially in Europe, stocks are lower and crude oil prices are down,” says Elias Haddad, a senior FX strategist at Commonwealth Bank of Australia.
When everyone started celebrating the end of Covid-19 in Europe in September, we started warning that lock-downs would be back on the table this winter— AndreasStenoLarsen (@AndreasSteno) November 19, 2021
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Many different factors have been cited by analysts for the eight week decline in the Euro-Swiss exchange rate although on Friday it was clear that global market risk aversion and a depreciating Euro were instrumental in driving EUR/CHF beneath 1.05 and to its lowest since July 2015.
“The SNB fully committed to defending this level back in H120, by undertaking FX purchases worth over CHF90bn over this period,” says Alexandre Dolci, a strategist at Credit Agricole. “The ‘million franc’ question arises: will the SNB stick to the same line in the sand for EUR/CHF in the near term?”
Above: EUR/CHF shown at weekly intervals.
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Friday’s losses will inevitably prompt market participants and observers alike to question or perhaps even speculate that a Swiss National Bank (SNB) intervention operation to prop up the exchange rate could be likely over the coming days.
The EUR/CHF exchange rate is viewed by the bank as an important instrument for achieving its monetary policy goal of price stability.
While recent data from the SNB suggests that it may have attempted to limit the eight week long decline in EUR/CHF, there are also reasons for why it might be unlikely to stand in the way of the latest leg downward.
These include the SNB’s own recognition of the Swiss Franc’s international role as a safe-haven asset for investors during periods of market turbulence and economic upheaval.
“The last three data releases suggest that the SNB has been more active in the market following the recent rise in the franc against the euro. However, any interventions appear to have been relatively modest and on a much smaller scale than those seen in early 2020,” says David Oxley, a senior Europe economist at Capital Economics.
“We suspect that the SNB’s “line in the sand” may now be closer to CHF 1.025, and that it could live with the franc rising to parity with the euro over the coming years,” Oxley and colleagues wrote in a November 12 briefing to clients.
The Euro-Swiss exchange rate always closely reflects the relative performances of the Euro and Swiss Franc against the U.S. Dollar for reasons relating to the underlying mechanics of the market and was quoted -0.56% lower at the London noon on Friday.
Above: CHF/USD and EUR/USD shown at daily intervals.
Meanwhile, the Euro-Dollar exchange rate was -0.68% lower and the USD/CHF exchange rate was a mere 0.12% higher after the Swiss Franc proved more resilient in the face of a rising U.S. Dollar.
USD/CHF resilience was also a driver of Friday’s decline in the Pound-to-Swiss Franc exchange rate, which retreated further from November’s highs in the price action that brought to an end Sterling’s effort at reversing the losses seen through late October and the early days of the current month.
Friday’s half percent decline in the Pound-Dollar rate was by far the larger driver of the unravelling GBP/CHF rate however, and analysts at Japan’s MUFG are looking for Sterling-Swiss to fall as far as 1.1900 over the coming weeks.
“We are maintaining a short GBP/CHF trade idea. We believe that risks for the GBP remain to the downside in the near-term,” said Lee Hardman, a currency analyst at MUFG, writing in a note on Friday, 12 November.
“The CHF should continue to benefit as well from building concerns over higher inflation. The CHF has proven to be better store of value over the long-term. It should also benefit from a pick-up in Brexit risks. Technically, EUR/CHF is approaching pandemic lows at 1.0505. CHF strength could accelerate if key support levels are broken and the SNB does not step up intervention to dampen the move,” Hardman also said.
Above: GBP/CHF shown at daily intervals.