G10 FX Weekly: EUR/CHF Is a Buy-on-Dips, Is Parity Possible?

Summary

• Long EUR/CHF was one of our strongest conviction trades in Q1 2024.
• The pair topped out earlier this month, but pullbacks have been shallow and short-lived.
• We think the Swiss National Bank could sell CHF during its easing cycle, while the BEER valuation for EUR/CHF sees the pair as 8.5% undervalued.
• Both factors would support further EUR/CHF gains.

Market Implications

• We think EUR/CHF is a buy-on-dips, initially targeting a new YTD high above 0.9850 and, later in 2024, a return to parity.

Long EUR/CHF Performed Well in Q1

Back in January, we highlighted EUR/CHF upside as one of our favoured trades to start the year.

We saw three key drivers of CHF depreciation – valuation, SNB messaging, and crowded positioning.

A month later, we reiterated this view. We pointed to a prospective SNB rate cut in March as a potential catalyst for EUR/CHF to trade back to 0.9650/0.9700, the previous high seen in November 2023.

The SNB delivered that rate cut, which surprised the market. And EUR/CHF traded not only back to the November high but beyond it, topping out just above 0.9830 (on a closing basis).

Chart 1: EUR/CHF Spot Price

The Surprise SNB Rate Cut Last Month Helped

Not only was the rate cut a surprise, but the SNB’s tone was dovish. It cited inflation being below the central bank’s target, which left the impression that further dovish shifts in monetary policy may be forthcoming, in addition to intervening in the FX market.

In the opening remarks at the press conference announcing the rate cut, SNB president Thomas Jordan said ‘we will therefore monitor the ongoing development of inflation closely. If necessary, we will adjust our monetary policy again.’

Jordan added: ‘We also remain willing to be active in the foreign exchange market as necessary. Our goal remains to keep inflation within the range consistent with price stability on a sustainable basis over the medium term.’

Given the SNB was buying CHF (and selling foreign reserves) during its hiking cycle, it is reasonable to expect the opposite while easing.

This will support EUR/CHF.

Valuation to Lead EUR/CHF Higher

As my colleague Ben Ford wrote earlier this week, long EUR/CHF is primarily a valuation trade.

In fact, Ben contends that EUR/CHF could be the value trade of the year.

Focusing on the BEER valuation for EUR/CHF, which accounts for the non-stationarity, the pair is nearing the bottom of its fair value range, currently 8.5% undervalued (Chart 2).

The last two range corrections saw over nine percentage point improvements in valuation in less than two years.

This, combined with the SNB’s dovish pivot last month, means EUR/CHF is a buy-on-dips. We think it could very easily return to parity like last year.

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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.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)