Swiss Franc Outperforms as Intervention Risk Grows with Prospect of Euro-Dollar Correction 

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The Swiss Franc appeared to be the world's top performing currency Thursday as the Euro faltered against the Dollar while the U.S. unit ceded ground to safe-haven counterparts, raising the risk of intervention from the Swiss National Bank and one that could grow if a EUR/USD correction takes hold.

The Franc climbed against all major developed and emerging market currencies, drawling a line under losses seen against the Dollar and Euro previously while potentially setting up the safe-haven unit for an SNB intervention. 

"I caution that if whatever flow was going through yesterday isn’t done then we could see the same size move again as there isn’t a great deal of interest out there to get in the way. But if things calm down then USDCHF should be a reasonable short and drift back down towards 90c," says the London FX dealing desk at J.P. Morgan, in a morning missive. "I think you can be short with a stop above the day’s highs at 0.9160." 

The SNB published a paper on Wednesday, a part of the abstract from which reads; "A calibration to Canadian data suggests that a decline in lower bound uncertainty is associated with a modest drop in long-term interest rates." 

Above: Swiss Franc performance against major developed and emerging world counterparts on Thursday. 

Switzerland already has the lowest interest rate of all countries and one that's thought to have already reached its 'economically effective lower bound" but in a foreign exchange market where everything is relative, which is hosted by a world where almost every other country is to some extent a financial reprobate, the Swiss SNB has not been able to prevent the Franc appreciating. 

It's not just Thursday that saw Swiss outperformance either because the Franc has risen against all major developed and emerging market counterparts for 2020 too. It scored a fresh five-year high against the Dollar on Wednesday and could be on the verge of assailing the Euro too. 

"It benefited from increased demand in the height of the market turmoil along with the Japanese Yen and US Dollar, but the Swiss National Bank (SNB) is determined to prevent the franc appreciating too much against the Euro," says George Vessey, a currency strategist at Western Union Business Solutions. "If the Swiss Franc suffers an aggressive wave of selling pressure, GBP/CHF may break out of its consolidation phase and charge towards the SFr1.22 threshold."

A chronically appreciating currency can a problem for any economy if it leads exports to become less competitive, which is often the case, while reducing the cost of and so incentivising imports. Exports are an addition in the calculation of GDP while imports are a subtraction.  

 Above: USD/CHF rate shown at daily intervals alongside Pound-to-Franc rate (orange line, left axis). 

But Switzerlands battle against the chronically appreciating Franc has gone on for years, gotten worse amid the coronavirus pandemic and resulting demand for safe-haven assets, but could become more aggravating still if analysts are right about the Euro having risen far enough for the time being.

"Since the EUR rally, there’s been a dearth of appealing trade setups that make sense to us from both a fundamental and technical perspective. The USD is due for a corrective move so our preference for now is to express our view via the crosses. One particular tactical trade that we can get behind is to get long EUR/CHF," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets. "We’d target a move back towards the 1.10 mark."

A falling EUR/USD rate wouldn't be welcomed by Switzerland's central bank because in a market where investors often seem to want almost nothing to do with the Dollar, a falling EUR/USD rate would almost certainly be reflected by falls in the all-important Euro-to-Franc rate. 

Two thirds of Swiss exports go to Euro denominated countries and are put at risk by extreme weakness in EUR/CHF that simply encourages economy-eating imports, which is why the SNB is thought to tailor its FX interventions with a view to propping up that exchange rate.

 Above: USD/CHF rate at daily intervals alongside EUR/CHF (orange line, left axis) and EUR/USD (black line, left axis). 

"EUR/CHF remains trapped in tight summer ranges and we see no reason for a break-out – unless a disorderly sell-off in Treasuries starts to hit US equities. We could also see CHF outperformance were USD/CHF to break under the 0.90 level – an event last seen in early 2015 when the SNB pulled the plug on the 1.20 floor. Notably EUR/CHF has not made much upside progress on the EU Recovery Fund news," says Francesco Pesole, a strategist at ING.

CIBC's Rai notes that SNB intervention in the foreign exchange market has stepped up of late while ING's Pesole flagged to clients previously in the August that the SNB might approach its intervention from a particular but very narrow direction in the weeks and months ahead. 

Pesole's said the SNB may attempt to lift the EUR/CHF rate by training its guns on USD/CHF. Buying the latter would generate an automatic uplift for EUR/CHF in a market where EUR/USD is rising and would be something like the only option for the SNB in a market where EUR/USD is falling. 

EUR/CHF is an amalgamation of EUR/USD and USD/CHF, but the EUR/USD rally is every bit the European Central Bank headache as a falling EUR/CHF is for the SNB. Buying EUR/USD weakness would make the SNB a bad neighbour and worse colleague in the tightknit community of central banks.