CHF Update – Forex Trading Tips

There is no trade call today as we are still monitor developments regarding Greece. Read through my CHF Update in order to stay up-to-date with the latest changes in the market.

Fundamental Bias: Bearish

Interest Rate

3M Target LIBOR Rate: -0.75%

Last Change: January 15, 2015 (-0.25%)

Expected Future Change: On hold

Next Decision: September 17

Inflation

Inflation Target: <2%

Period: Year ending June 30

CPI: -1.00%

Next Release: August 5

Employment

Period: June

Unemployment Rate: 3.3%

Next Release: August 7

Growth

Period: Year ending May 29

GDP: 1.1%

Next release: August 27

Summary

• The Swiss franc is seen as a safe-haven asset and appreciates in times of uncertainty.

• Starting in mid-2010, the franc began appreciating against the US dollar as investors sought safety amid the worsening Greek debt situation. By August 2011 a franc was worth more than $1.40, or approximately 70 rappen per USD.

• On September 6, 2011, as the franc appreciation headed for parity with the euro, the SNB installed a minimum exchange rate of 1.20 francs per euro, which capped the franc’s appreciation.

• On 18 December 2014, the Swiss central bank introduced a negative interest rate on bank deposits to support its CHF ceiling.

• Since its establishment, all SNB officials, including Jordan, continually repeated that they were prepared to buy foreign currency in unlimited quantities in order to defend the EURCHF floor. Despite these assurances, on January 15 2015, without warning, the SNB announced an abandonment of the franc cap, causing an abrupt and extreme appreciation in the franc. EURCHF fell over 36 points immediately – one of the most volatile moves in the history of foreign exchange. The price range of the franc on that day was equivalent to the range the franc traverses in a 2-3 year period.

• The Swiss National Bank lost credibility due the turmoil they unwittingly unleashed on the markets by saying one thing then doing the opposite.

Analysis

Much like the yen and to a lesser extent the euro, the franc is relatively unaffected by individual economic data points due monetary policy already being set at the farthest end of the easing spectrum. The SNB’s current interest rate of -0.75% is the lowest of all major economies.

After the removal of the EURCHF floor, the SNB have intervened on multiple occasions by selling francs to drive the price of EURCHF higher and support Swiss exports. They have also repeatedly communicated that they intend to continue doing so and that EURCHF should be above Fr.1.10. Intervention is suspected when sudden short-term rallies occur in EURCHF without any news as a catalyst. Confirmation of intervention can be made only after the fact when the SNB disclose their monthly foreign exchange reserves; increases in foreign currency holdings indicate intervention during the month.

In the recent monetary policy assessment, released on June 18, the SNB forecast inflation to gradually rise from the current levels at the time of -1.2% to about 1.75% at the end of 2017. The Bank expects growth of just under 1% in 2015. They also noted that the precarious situation with Greece could jeopardise Switzerland’s recovery.

The recent inflation readings, released July 6, saw CPI in Switzerland tick up to -1% from -1.2%. This is the first tick higher since October 2014. Although the increase in prices is positive for the economy, the SNB have made it clear that they are mostly concerned with the strength of the franc rather than the current environment of deflation. This is reflected in their monetary policy and language. Nevertheless, price stability is a key aspect of the Bank’s policy mandate.

In the press conference that followed the rate decision, where rates remained on hold as expected at -0.75%, Jordan said that negative rates “should help correct the over-valuation [of the franc]“. He also reiterated the Bank’s readiness to intervene in the currency market if necessary. The prospect of intervention increases if EURCHF moves lower. Because the pair has maintained a 300 pip range since March, there is currently no great pressure on the SNB to intervene. If the pair breaks the lows at 1.0230 then we should be armed for another bout of buying from the Bank.

On June 25, Thomas Jordan said in a speech that “the Swiss franc is currently significantly overvalued. Monetary policy is geared towards this challenging set of circumstances, and is guided by the SNB’s willingness to take an active role in the foreign exchange market and apply negative interest rates.” Such statements are not unusual from the central bank chairman who regularly states that the franc is too high. A week later Jordan informed the market that the SNB had bought EURCHF on Monday, June 29 to combat the depreciating euro which was pressured from Greece’s refusal to accept its creditor’s proposal.

The franc is an awkward currency to trade; it can suddenly strengthen on safe-haven demand – which may occur due to the Greek situation – or it can weaken due to SNB intervention. From a interest rates perspective its one of the weakest currencies, but due to the financial stability of the country this fundamental weakness can easily become overpowered. The franc remains a bearish currency, but not one that we are actively looking to trade for the time being.

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