CHF: It was going so well - Rabobank

Between the end of 2016 and its January peak, the value of the EUR rose by just under 10% vs. the CHF and the sharp drop in risk appetite in late January and through into February then sent buyers rushing back into safe haven assets, explains Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“Although the value of EUR/CHF has subsequently stabilised, it remains well below last month’s peak.  The fact that the safe haven JPY is also holding well above its January levels vs. both the EUR and the USD is strong evidence of the fact that risk appetite remains some way below the levels obvious at the start of the year.  This, of course, can be linked back to expectations regarding Federal Reserve policy and the cost of money.  The yield on the 10 year t-note may have edged below its recent high, but it remains noticeably higher than at the start of 2018.”

“Strong growth in the Eurozone last year and a calmer than expected political backdrop favoured the EUR and allowed safe haven demand to finally relax its grip on the CHF.  The improvement in risk appetite last year turned investors’ attention back to yield which allowed the SNB’s aggressively accommodative policy settings to have more sway in reducing demand for the CHF.”

“The CHF has been overvalued for such a prolonged period, that the SNB has been forced to maintain a negative interest rate policy in addition to a threat to intervene in the FX market. This policy has not been without its costs.  Switzerland along with countries such as Norway, Sweden, Canada and Australia has seen house prices and levels of household debt soar as a consequence of a prolonged period of low interest rates.  This is an unwelcome side effect but one that these respective central banks have to manage given that an early normalisation of interest rates would place too much upward pressure on their exchange rates.”

“According to the OECD’s PPP measure of fair value, the CHF is currently about 40% overvalued vs. the EUR. This implies that the SNB will not be pleased that last year’s recovery in risk appetite has suffered a setback and the uptrend in EUR/CHF has stalled.  The strength of the CHF continues to hold the SNB over a barrel leaving the policymakers with little option but to continue pledging to maintain ultra-accommodative settings.  It is possible that the SNB will be the last G10 central bank to start backing out of its ultra-accommodative polices.”

“If the market were to regain the same levels of risk appetite as was in evidence at the start of the year, the SNB’s policies would likely again work to lower the value of the CHF vs. the EUR and the USD. As it stands, however, the market is coming to terms with the possibly of less USD liquidity which is set to be a headwind to growth and risk appetite.  Although strong world growth lessens the likelihood of a strong surge in safe haven demand for the CHF in the months ahead, we expect that EUR/CHF may struggle to move far above the 1.16 level on a 3 month view.  We have a 12 mth forecast of EUR/CHF1.18.”