Swiss Franc and SNB Intervention: USD/CHF Upside Most Likely

• Risk of SNB FX interventions said to be elevated
• EUR/CHF brush with parity only one side of story
• Upside impacts larger in USD/CHF than EUR/CHF
• Global market recovery likely staying SNB's hand

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The Swiss Franc’s probe above parity with the Euro has elicited comment from the Swiss National Bank (SNB) and prompted market speculation about a possible bid to prop up EUR/CHF, although it’s likely that any direct intervention would have the greatest impact on USD/CHF.

Switzerland’s Franc was one of the currency market’s few winners during the week after the Russian army crossed its border into Ukraine, which weighed heavily on USD/CHF and led the Swiss currency to appreciate against a great many others including the Euro and Pound Sterling.

Despite the widespread appreciation the Franc’s advance against the Euro gained the lion’s share of attention in the market and elicited comment from an SNB official in the local press on Saturday, likely because accounts for almost half of Switzerland’s overall trade-weighted exchange rate.

“After a prolonged period of radio silence, Swiss officials have been more vocal in their concerns about the appreciation in CHF as EUR/CHF approaches parity. We stated recently that the SNB does not have a line in the sand per se, but that parity could be of particular significance and so that has proved,” says Kamal Sharma, an FX strategist at BofA Global Research.

Above: EUR/CHF shown at daily intervals alongside USD/CHF and EUR/USD.

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Before it's Monday and Tuesday recovery, EUR/CHF fell by almost three percent last week and will have had the effect of lifting the overall Swiss Franc by almost half that amount in a market where the losses of many other currencies were also adding further to the increase in the trade-weighted Franc.

“The SNB has stated that it looks at the broader move in CHF and not just the EUR/CHF rate. The TWI is now at record highs, breaking above the post-peg fallout though USD/CHF is still comfortably within ranges. Renewed verbal rhetoric suggests that intervention risks have risen: parity may provide some near-term support,” BofA’s Sharma wrote in a Monday research briefing.

Russia’s invasion of Ukraine triggered a slump in global markets and exodus of capital from all economies and currencies in close proximity to the conflict last week, although many of these moves went into reverse late in the European session on Monday.

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That recovery continued on Tuesday with analysts citing a range of prospective drivers including a European Union decision not to impose an embargo on Russian oil and gas imports - favouring instead an attempt to steadily ween continental economies off Russian resources - as well as speculation that European Union countries could be considering further issuance of jointly underwritten debt.

“The weekly sight deposits data are proof that the SNB has been on the side-lines for the last six weeks but we should see a blip in the data next Monday. The warning by the Swiss economy minister last week was a sign of things to come and the move below parity was the break too far,” says Kenneth Broux, a strategist at Societe Generale, in reference to EUR/CHF.

While the global market recovery and its uplifting impact on EUR/USD would inevitably have played a role in lifting EUR/CHF back above parity on Monday and Tuesday, many analysts suspect the latter exchange rate received a helping hand from the SNB and with the USD/CHF exchange rate having more-than reversed last week’s decline in the interim, they could be right.

Above: USD/CHF shown at daily intervals with Fibonacci retracements of June 2021 increase indicating likely areas of technical support for USD, and shown alongside EUR/CHF.

The EUR/CHF exchange rate tends to closely reflect the relative performance of EUR/USD and the Swiss Franc measured against the U.S. Dollar, although the USD/CHF pair is the more malleable and effective means through which the SNB is able to influence both EUR/CHF and the overall trade-weighted Swiss Franc; referred to by policymakers as the “effective exchange rate.”

Switzerland’s central bank is able to stabilise or even lift EUR/CHF and at the same time smother increases in the overall trade-weighted Swiss Franc through buying USD/CHF, which also itself accounts for 15% of the effective exchange rate.

This method would have the effect of lifting USD/CHF to a greater extent than EUR/CHF unless the intervention occurs in a market environment where EUR/USD is also rising, which means that in most instances where there is a risk of intervention in the market by the SNB, it would very likely be USD/CHF that has the most upside potential rather than EUR/CHF.

“The SNB this morning stated that it takes the overall currency situation into control and that individual currency pairs do not play any special role. This highlights the importance of the effective exchange rate vs. EUR/CHF for policymakers,” says Jane Foley, head of FX strategy at Rabobank.

“Given that politicians have warned that the situation in Ukraine could take months to resolve, we think that EUR/CHF can fall further in the coming weeks and see scope for a drop towards the 0.98 area. That said, parity remains a key support level,” Foley also said on Monday.

Above: EUR/CHF at monthly intervals with Fibonacci retracements of recovery from 2015 lows indicating likely areas of technical support for Euro.