G10 FX Weekly: The Year CHF Loses Its Crown

Summary

• The Swiss franc (CHF) was the strongest G10 currency in 2023, rallying sharply in December as asset managers aggressively increased long positioning.
• The CHF is at or near record highs versus several G10 currencies, suggesting valuations may be stretched.
• The Swiss National Bank (SNB) says it is no longer biased to support the CHF via intervention, citing the currency’s most recent strength as a potential problem.

Market Implications

• We see value in positioning for a retracement lower in the CHF.
• We like buying EUR/CHF, scaling into a long position, with a view to the pair trading back to the November highs in the 0.9650/0.9700 range.

Three Drivers of CHF Depreciation

There are three reasons why building a EUR/CHF long position is attractive:

• Valuation – the CHF is at record highs versus several other G10 currencies.
• The SNB is no longer focussed on intervention to support the CHF.
• Long positioning in the CHF is at multi-year highs, suggesting crowded positioning.

CHF Beat All G10 Peers in 2023

The CHF was the strongest performer in the G10 last year and trades near record highs against a wide range of its G10 peers. On a trade-weighted basis, the franc printed an all-time high earlier this month.

On a closing basis, it made a record high versus the euro a couple of weeks ago.

The franc also printed a record high against the yen last week.

We therefore think CHF valuations may be stretched and that consequently the currency is overdue a downward correction.

The SNB Has Been Key to CHF Strength

The SNB has raised rates 250bps since they began hiking in mid-2022. This is aggressive by Swiss standards.

Most importantly, however, the SNB had been buying CHF in the market to counter imported inflation.

SNB Says Intervention No Longer a Priority

At its most recent monetary policy update last month, the SNB said it was no longer focussed on buying the CHF. While it wants to retain the option of intervention, it sees more two-way risk now.

SNB Chairman Thomas Jordan reiterated this messaging yesterday, stating explicitly that the Swiss franc’s gains toward the end of last month drove the currency to levels that ‘makes the situation for some of our firms more difficult.’

The central bank’s CHF purchasing has been the biggest impediment to shorting the currency since the SNB’s tightening cycle began in 2022.

Therefore, the SNB’s shift in messaging is very important. Traders are no longer fighting the central bank when shorting the CHF, making CHF deprecation more likely.

Long Positioning at Extreme Levels

The CHF’s sharp appreciation towards the end of last month coincided with a big build-up of long positions by asset managers – to levels exceeding those seen during the pandemic.

This seems more than just a coincidence.

Therefore, with positioning at multi-year extremes and likely crowded, conditions are more favourable to shorting the franc.

 We like buying EUR/CHF, scaling into a long position, with a view to the pair trading back to the November highs in the 0.9650/0.9700 range.

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.)