The euro is set to rally against the Swiss franc to levels between 1.18 and 1.20, and perhaps beyond, according to a consensus opinion of bank research teams. The euro ended Wednesday’s New York session buying 1.1542 francs and has so far averaged 1.11 francs in 2017.
The driving force for euro appreciation against the franc will be a simple one according to Credit Agricole; that being a divergence in the paths of monetary policy between the European Central Bank and Swiss National Bank.
The SNB has upheld extremely aggressive policy stimulus in recent years, which has included the world’s lowest interest rate – currently minus 0.75% – and frequent foreign exchange intervention to weaken a currency which it sees as overvalued. And unlike the ECB, which will begin discussing an end to its quantitative easing program this month, the SNB has so far shown no desire to reverse course on current policy.
“With the SNB likely to keep interest rates lower for longer as compared to the ECB, there is room for diverging monetary policy expectations to benefit…EUR/CHF,” explains an analyst at Credit Agricole.
The unnamed analyst goes on to forecast 1.18 in EUR/CHF over the medium term.
Going even further this week is Bank of America Merrill Lynch, which sees a “minimum target” in EUR/CHF of 1.20 by the end of next year. BAML believes that the franc will be the funding currency of choice for the carry trade in the coming months, which means that traders will borrow francs at low interest rates and invest those francs in higher-yielding currencies. EUR/CHF also “looks cheap relative to its longer-term moving averages,” says the bank.
A return to 1.20 in EUR/CHF would be highly significant; that being the rate at which the SNB formerly capped the franc’s value against the euro. The bank rocked foreign exchange markets and sent some smaller dealers out of business when it unexpectedly abandoned the cap in January 2015. A colossal 20% fall in EUR/CHF followed the decision and it would no doubt please central bankers in Switzerland to see the franc weaken back to this level.
Also on the “buy euros, sell francs” bandwagon is Dutch bank ING, who said this week that “we would be inclined to enter long EUR positions against the CHF,” although the bank declined from giving a precise target for the rate.
Potential obstacles to franc weakness are highlighted by both BAML and Credit Agricole, and those are the current political situations involving Catalonia’s push for independence from Spain and Germany’s as yet unformed government.
Political instability ranks highly on a list of things that investors dislike and in such an environment investors typically dump the financial instruments effected (the euro) and purchase a safe haven asset (the franc).
However, Credit Agricole and ING offer valid reasons why the aforementioned uncertainties should minimally impact any long EUR/CHF positions, if at all.
First of all, the franc’s status as a safe haven is not what it once was.
“The SNB’s aggressive stance with respect to currency intervention is likely to keep the franc’s safe haven appeal low,” explains Credit Agricole.
The French bank adds that it doesn’t think that either of the Catalonian or German problems can have a “sustainable impact on market sentiment.”
Furthermore, “given the limited systemic risks [of Catalonia’s independence movement] to broader eurozone financial markets…any fundamental euro fallout is unlikely,” says ING.
Author: Joel Wright
Joel has been involved in the markets for the past 10 years. During that time he’s worked in market analysis teams in London, in the financial technology sector in Singapore – working mostly with automated trading tools and algorithms – and most recently he’s been planning FX risk hedging for an SME in Bangkok. Joel has a first-class honours degree in Financial Services and currently writes about foreign exchange for several global businesses.
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