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EURCHF is so far tracking our forecast which assumes a softening in the SNB’s intervention regime and a resultant orderly decline of around one cent per quarter in the cross to 1.03 by year-end. The SNB is certainly not about to abandon the franc entirely to market forces -the excess net private sector demand for CHF stands at 10% of GDP, which would likely cause the franc to appreciate by 5-10%in the absence of countervailing FX intervention.
Nevertheless, there is evidence from the central bank’s rhetoric and action that the SNB is becoming more flexible in its currency policy and that the objective is mutating from the maintenance of a stable bilateral exchange rate versus EUR towards controlling the pace of franc appreciation.
Bearish Scenarios:
1) 3-4 Fed hikes encourages heavier capital outflows and a resumption of CHF funded carry trades.
2) Breakdown of EU talks over restrictions on free movement of labor.
Bullish Scenarios:
1) The SNB continues to taper but at a faster pace.
2) The US Treasury cites Switzerland as a currency manipulator.
3) President Le Pen - Finally, our CHF forecasts are predicted on Le Pen losing the French election and would need to be upgraded by at least 5% should she triumph (we attach a 15% probability to this scenario).
