Euro-Franc: Plunge Further Below Parity to be Avoided says UniCredit

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The Euro to Franc exchange rate will end the year back above parity says a foreign exchange analysts at one of Europe's largest banks.

Roberto Mialich, FX Strategist at UniCredit Bank, says the Euro will likely stay below 1.0 over the near term but a further plunge below these levels now looks less likely.

"The SNB can better tolerate today a strong currency to counter inflation. Yet, it will likely counter CHF strengthening that would harm the economy during the current rate hike cycle," says Mialich.

The Swiss National Bank (SNB) on Thursday June 16 surprised markets with a 50 basis point rate hike, a move that sent the Franc soaring in value.

The declines culminated in a fall below parity in Euro-Franc on July 05; the pair is currently at 0.9925.

Foreign exchange analysts already suspect the SNB is guarding against a too rapid appreciation in the Franc, citing the SNB's domestic sight deposits.

These are the reserves of foreign exchange the SNB declares and changes in the deposits can indicate how active the central bank has been in managing its currency.

Sight deposits at the SNB rose to nearly CHF 640BN in the week ending 15 July from CHF 635BN in the previous week.

"The rise can be seen as an early sign that the SNB has probably been active in the FX market to counter the CHF strength," says Mialich.

"The SNB may see a strong CHF as a tool to counter inflation, but we doubt that it would accept a 2015style CHF strengthening, which might weigh on the Swiss economy in addition to rate hikes," he adds.

With regards to the all-important question of interest rate hikes, UniCredit expects the SNB to normalise monetary policy by raising its basic rate up to 1.00% by the second quarter of 2023.

This tightening will be slightly slower than that expected out of the ECB, which is expected to lift the deposit rate to 1.25% by the firs quarter of 2023, and remain on hold thereafter.

"We thus expect the spread between the ECB and the SNB policy rates to move slightly back in the EUR favor over the coming quarters," says Mialich.

UniCredit forecasts Euro-Franc to trade below parity for now but recover back to 1.03 by the fourth quarter of 2022 and 1.05 by the fourth quarter 2023.