Swiss franc, higher jump is tough

The Swiss Franc has strengthened much more than previously expected, and this has resulted in EUR/CHF falling to 1.1726 from its 1.2005 peak in April.

Now further arguments are marshaling to suggest more downside for the pair is likely in the future mainly due to the fresh Eurozone debt crisis in Italy and the impact of weak equity markets in the US.

In April, after rising up and touching the key 1.2005 level, analysts had expected the Euro-Franc rate to rise even further (the Franc to weaken).

Their conclusion was based mainly on analysis of the Swiss National Bank (SNB) who have pursued a weak Franc policy for years and were, therefore, unlikely to stand in the way of further weakness.

Record low unemployment and a robust economic outlook weren’t likely to change the SNB’s mind, especially as their balance sheet showed little change in FX deposits, suggesting they were not actively intervening in markets.

Switzerland’s ultra-low -0.75% interest rate was a further negative factor for the Franc as foreign capital tends to prefer flowing to places where it can earn more not less interest.

Therefore, everything seemed set for EUR/CHF to break back above 1.20 and perhaps head up to 1.30, yet ultimately it failed and the exchange rate sank back down to the current 1.17s as the Euro weakened and the Franc started to appreciate.

Data showing slowing growth in the Eurozone in Q1 propelled the sell-off, and the news of the coalition forming in Italy from the two most Euroskeptic parties in Italian politics was a further blow as it revived fears of an Italexit.

The news of the coalition government also helped the Swiss Franc appreciate, as it increased safe-haven flows, of which the Franc is a major beneficiary.

“The growing likelihood of a Movement Five Star/League coalition government along with coded signals of EUR skepticism have provided a sharp reminder of the risks that remain. The net result has been that the EUR has fallen over 2% against the CHF and is already challenging the broad trend up from the time of the French presidential election,” says Simon Derrick, chief strategist at BNY Mellon.

Another factor in favour of a strengthening Franc is based on the relatively high ownership of US equities in Switzerland, most notably by the SNB itself. This fact in combination with the negative outlook for US equities could cause sudden surges in repatriation flows back into Francs as Swiss investors and the SNB bailout of US stocks and bring their money back home, according to dealers at LMAX foreign exchange brokers in London.

“The SNB will need to be careful right now, as its strategy to weaken the Franc could face headwinds from the US equity market,” says LMAX.

“The record run in the US stock market has been a big boost to the SNB’s strategy with elevated sentiment encouraging Franc weakness. Of course, the SNB is no stranger to this risk, given a balance sheet with massive exposure to US equities,” adds the broker.

“But any signs of a more intensified liquidation on that front in Q2 2018, will likely invite a very large wave of demand for the Franc, which will put the SNB in a more challenging position to weaken the Franc,” they conclude.