CHF: Calm after the storm

Some of the strong franc themes that fatally undermined the SNB's FX regime this year continue into next, albeit the outlook for EUR/CHF is inherently less unstable now that much of the short investor base in CHF has been unwound and divergent national conditions are better reflected near 1.10 than at 1.20. Positives for the franc include an SNB which has less reason and less inclination than the ECB to ease; structural demand for the currency via a still sizeable current account surplus; and relatively sticky capital flows (ECB easing will reinforce the home-market bias of Swiss investors and discourage repatriation of non-resident CHF-deposits).  

Negatives include episodic carry trade selling (any revival in the global carry trade is expected to be sporadic rather than systematic, so tactically not structural negative for CHF) and persistent, low-key FX intervention from the SNB (consistent with earlier media suggestions the central bank is targeting a more realistic and softer floor in EUR/CHF up to 1.10). EUR/CHF is expected to respect a relatively tight two-three cent range either side of 1.10, so somewhat similar to the last global tightening cycle when lift-off for the cross occurred not in 2004 with the Fed but only in 2006 after the ECB had hiked.  

Risks scenarios are weighted towards a lower than higher EUR/CHF - it would be easier for the ECB to aggravate Switzerland's chronic balance of payments disequilibrium than for the SNB to alleviate it. The volatility aftershocks from January will continue to subside as policy and positioning risks have been purged. The lessening in tail risk favours modestly lower volatility and tighter risk reversals. EUR/CHF is expected to dip to 1.06 by mid-year before rebounding to 1.10 by end-2016.