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Summary
- Amid the market turmoil this week, on Monday EUR/CHF traded at its lowest level since 2015 (~0.9211). That day, the Swiss National Bank (SNB) abandoned the EUR/CHF ‘floor’ at 1.2000.
- Since then, although the pair has traded choppily, EUR/CHF has bounced decisively off this week’s low to now trade over 2.5% higher at 0.9460.
- We expect price action will remain volatile in EUR/CHF. However, any sell-off that approaches ~0.9300, the SNB will verbally intervene to support the pair and sell CHF to stem further material haven-driven franc buying.
Market Implications
- We think EUR/CHF is a buy-on-dips and although traders should remain nimble and opportunistic, the SNB will not allow EUR/CHF to fall below this week’s price trough.
EUR/CHF Has Traded Heavily Since Late May
After rallying significantly in early 2024, EUR/CHF has traded lower over the past few months.
Chart 1: EUR/CHF Spot Rate = Orange Line
The pair peaked in late May, before trading lower when SNB President Thomas Jordan flagged the weakening CHF as the most likely source of then-higher Swiss inflation.
EUR/CHF fell from above 0.9900 before trading sideways on a 0.9700 handle in early June.
When French elections were announced on 9 June, EUR/CHF fell lower as European political uncertainty triggered flight-to-quality Swiss franc demand. EUR/CHF traded just below 0.9500 on the eve of the SNB rate announcement on 20 June.
The SNB (somewhat surprisingly) cut rates that day, leading to a rally in EUR/CHF in the following weeks. The pair has fallen in recent weeks, culminating in the low print just above 0.9200 this past Monday.
Swiss Manufacturers Have Been Vocal About EUR/CHF
Swissmem, Switzerland’s biggest lobby group for manufacturers, said on Wednesday the SNB must act quickly and decisively to keep CHF strength from hurting exporters.
The sudden CHF appreciation threatens a vulnerable recovery for overseas sales over recent months, Swissmem added.
This echoes sentiments earlier this year, when EUR/CHF was trading below 0.9300, as it did earlier this week.
Back then, Jordan acknowledged the strong CHF ‘made the situation for some of our firms more difficult.’
Following this, the SNB has cut rates in March and at its most recent monetary policy update in June.
SNB Will Take Heed of These Concerns…
However, we think the most important development from the June SNB meeting was the statement accompanying the 25bp rate cut.
In this statement, the central bank noted the CHF ‘has increased in value again significantly in the past weeks,’ and that CHF strength cast doubt on inflation remaining elevated.
We interpreted this as an SNB concern of disinflation resulting from a strong currency.
And, most importantly, given the dynamics outlined above, that the SNB would ‘be willing to be active in the foreign exchange market as necessary.’
… And Not Allow EUR/CHF to Tumble Materially Further
So, in June, the SNB explicitly stated it would push back against material CHF strengthening.
Back then, the big driver of CHF strength was European political uncertainty.
This risk persists, as does elevated geopolitical uncertainty.
Also, the recent market volatility has driven the CHF to levels not seen since the flash crash in 2015.
All this signals significant challenges for the SNB.
Given the SNB’s most recent pronouncements in June about its willingness to intervene to weaken the CHF, together with concerns from Swiss industry about CHF strength, we see limited scope for further downside in EUR/CHF.
It is tough to specify a ‘line in the sand’ level that might trigger SNB intervention (verbal or actual) but we think ~0.9300 is a decent benchmark.
Ahead of that level, we think EUR/CHF price dips present buying opportunities.
Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.