Swiss Franc: EUR/CHF Offers a Buying Opportunity say Two Investment Banks

- CHF underperformance fades alongside EUR's losses, GBP's gains
- Creates buying opportunity in EUR/CHF says Goldman Sachs, UBS
- Swiss Franc strength seen as incongruous with a Eurozone recovery

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The Swiss Franc has pared first-quarter losses against the Dollar, Euro and Pound of late, although UBS and Goldman Sachs say this has created a bargain and buying opportunity in the EUR/CHF exchange rate.

Switzerland’s safe-haven Franc remained the second worst performing major currency of 2021 on Thursday although by a much lesser margin than was the case just a handful of weeks ago, with the reversal coming as and after the Euro bottomed out in early April following a troublesome opening quarter.

The Euro-Dollar exchange rate has since bounded back from its early April lows and concurrently other currencies in the neighbourhood have also risen alongside expectations for the Eurozone economy, which might explain why Switzerland's Franc has also climbed even if it's left analysts bemused slightly.

“Against this backdrop it has been a bit puzzling to see the Swiss Franc - Europe’s safe-haven currency-trading stronger against both the Dollar and Euro,” says Michael Cahill, a G10 FX strategist at Goldman Sachs.

“In our view, it is likely that CHF depreciation in Q1 was fueled by investors using it as a funding currency in the real rates selloff. In that context, it is understandable to see the CHF selloff reversing somewhat as rates retrace, but we think this appreciation runs against fundamentals,” Cahill adds.

Above: EUR/CHF shown at daily intervals with USD/CHF.

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Cahill and the Goldman Sachs team advocated this week that clients of the bank sell the Franc and buy the Euro instead, citing an incongruousness between its safe-haven characteristics and recent developments in the neighbouring Eurozone where vaccinations and available supply are rising quickly.

This has seen economies reopening ahead of what is widely tipped to be a summer of recovery.

They’re targeting a move up to 1.14 for EUR/CHF, anticipating that the Franc will again be used as a “funding currency” whereby it would be sold for the Euro and other counterparts which offer either better yields or more attractive price return prospects to investors.

"The Swiss franc remains stubbornly strong despite the better European narrative and improving flows into Europe. Fundamentally, the franc should already be weaker,” says Moritz Diller, a strategist at UBS.

"The key is locals who have been notoriously reluctant to move capital abroad. As we highlighted before, scarring from the SNB’s 1.20 floor release in 2015 led to a significant increase in domestic assets holdings," Diller adds.

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Switzerland’s Franc spent much of the first quarter under pressure alongside Europe’s single currency while the Pound, U.S. Dollar and commodity currencies like the Canadian Dollar rose.

The latter were all aided by a mixture of swift progress vaccinating populations against the coronavirus, rising commodity prices and shifts in the rhetoric as well as policy stances of the central banks concerned.

But the opportunity landscape has shifted of late with European countries and economies closing the gap on vaccinations and growth prospects, while momentum in Sterling, Canada’s Loonie and the U.S. Dollar has ebbed.

And although this is widely seen as supportive of the Euro; neither Goldman Sachs nor UBS are convinced that it should be in any way helpful to the Swiss Franc.

“To entice outflows, confidence in the global (and particularly European) outlook likely needs to broaden further. We think this may be imminent as Europe's fiscal and reopening driven growth acceleration becomes more obvious, expectations about ECB tapering rise and the dollar's downward momentum resumes," UBS' Diller says.

Above: Euro-Swiss Franc exchange rate at weekly intervals alongside EUR/USD.

“We guess leveraged accounts will take EURCHF towards 1.13-14 as the above dynamics get priced,” Diller adds.

The Franc is often described by analysts as a “funding currency” in part because Switzerland has the lowest interest rate in the world, which means it can be borrowed cheaply and then sold in order to fund potentially more rewarding wagers on currencies that at least look to be offering better return prospects.

Meanwhile, the Swiss National Bank’s (SNB) resulting preference for using foreign exchange market interventions to protect or otherwise help attain its inflation target has made Swiss exchange rates an unproductive place to be for many traders.

SNB policymakers have been unable to sustainably meet loosely defined inflation and economic objectives for decades and in part because of a Franc that has been chronically overvalued by the market in a process that obstructs the bank from meeting its targets by providing an almost neverending subsidy of Swiss imports.

"We recommend investors take advantage of what looks like an attractive entry point and go long EUR/CHF with a target of 1.14," Goldman Sachs' Cahill says.