FxWIrePro: SNB’s approach to Swiss franc and CHF relative value trades

CHF is the best performing DM currency over the past three months, indeed is the only currency to have gained vs USD over this period. A combination of anxiety about the Italian budget, the broadening of stress in EM, attendant pressure on cross-border CHF funding, and a growing recognition that Swiss monetary policy is increasingly out of line for what is now a strongly growing economy, have all contributed to the robust performance of the franc, albeit the contribution of these factors has varied over time.

Is Swiss National bank (SNB) concerned about the current EUR-CHF levels? Many market participants are likely to hope for an answer to this question in the shape of the SNB’s quarterly monetary policy report today. Focus will of course rest on its choice of words for the exchange rate, i.e. does it still refer to the currency as being “highly valued” or will it go back to calling it “overvalued” as was last the case in mid-2017. One thing is clear, and that is that the exchange rate development over the past two month was not in the interest of the central bank.

However, so far there is no indication that the SNB has already intervened on the market to prevent further franc appreciation. That suggests that the currency strength is still within tolerable levels. Most recently intervention was no longer necessary anyway as the Emerging Market turbulence eased so that risk aversion too has fallen. 

However, for now uncertainty remains, in particular as regards Turkey, where the central bank has yet to prove that it really can act independently. We therefore assume that the SNB will at least reconfirm its willingness to intervene on the FX market today. It will probably refrain from changing its choice of words for the exchange rate though. 

What does that mean for the future development of CHF? Not much to be honest. Even if the SNB were to change its view today, what exactly would that result in? After all this is the fate of a currency whose main characteristic is that it acts as a safe haven. The exchange rate is much more exposed to fluctuations in market sentiment than is the case in the other G10 currencies. 

Short NZDCHF, simultaneously, hold EURCHF, 
Swiss franc has been the best performing DM currency in therecent months, indeed the only currency to have gained vs USD. We maintain bullish stance albeit rotate GBPCHF into NZDCHF while holding a short in EURCHF. CHF boasts the largest current account surplus of the funding currencies (more than twice as large as Japan's) and has cross-border bank claims denominated in CHF which as a percent of GDP are as large as those in USD and twice as large as loans denominated in JPY (70% vs 35% of GDP). Moreover, CHF is no longer expensive in real terms (CHF REER is below its 30Y average) while its economy has accelerated and is growing twice as fast as the Euro area. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly NZD is inching at 75 (which is bullish), USD spot index is flashing at -125 levels (which is bearish), EUR is at 81 (bullish), and GBP is at 81 (bullish), while articulating (at 13:47 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex