Back
30 Oct 2015
EUR/CHF at risks of dropping modestly lower – Rabobank
FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that after the USD the CHF is the second best performing G10 currency on a 12 month view which suggests that the SNB been far less successful this year at managing its exchange rate than the Riksbank.
Key Quotes
“This is perhaps because higher liquidity means that the CHF has historically played a role as a safe haven currency resulting in unwanted inflow into the CHF in times of elevated uncertainty. That said, we would argue that the SNB’s aggressive policies have had some success this year, most notably because the CHF did not perform well as a safe have currency this summer despite elevated risk stemming firstly from Greece and then from China.”
“Between the start of June and the start of October the value of the CHF dropped 5.5% vs. the EUR. This move, however, was likely amplified by the covering of aggressive EUR shorts positions in this period which we expect will be difficult to replicate in the comings months. These short EUR positions were built at the start of the year as the EUR was used to fund carry trade. Although risk appetite has improved in October, we would argue that it is still clouded by concerns about Chinese and emerging market growth going forward.”
“These concerns could limit the attraction and diversity of carry trades and therefore inhibit the degree to which the ECB can encourage fresh EUR short positions. Even so, we would expect further policy action by the ECB this year to undermine the value of the EUR to some degree and this suggests that there is a risk that EUR/CHF can drop moderately lower.”
“In turn this risk suggests that the SNB may be forced to step up the ante and we would expect that it will refresh its threats to intervene in the FX market. We maintain a central forecast that EUR/CHF is likely to hold around the 1.08 area in the coming months. However, there risk that further ECB policy action could create some pressure for a move back towards 1.07.”
Key Quotes
“This is perhaps because higher liquidity means that the CHF has historically played a role as a safe haven currency resulting in unwanted inflow into the CHF in times of elevated uncertainty. That said, we would argue that the SNB’s aggressive policies have had some success this year, most notably because the CHF did not perform well as a safe have currency this summer despite elevated risk stemming firstly from Greece and then from China.”
“Between the start of June and the start of October the value of the CHF dropped 5.5% vs. the EUR. This move, however, was likely amplified by the covering of aggressive EUR shorts positions in this period which we expect will be difficult to replicate in the comings months. These short EUR positions were built at the start of the year as the EUR was used to fund carry trade. Although risk appetite has improved in October, we would argue that it is still clouded by concerns about Chinese and emerging market growth going forward.”
“These concerns could limit the attraction and diversity of carry trades and therefore inhibit the degree to which the ECB can encourage fresh EUR short positions. Even so, we would expect further policy action by the ECB this year to undermine the value of the EUR to some degree and this suggests that there is a risk that EUR/CHF can drop moderately lower.”
“In turn this risk suggests that the SNB may be forced to step up the ante and we would expect that it will refresh its threats to intervene in the FX market. We maintain a central forecast that EUR/CHF is likely to hold around the 1.08 area in the coming months. However, there risk that further ECB policy action could create some pressure for a move back towards 1.07.”