EURCHF Surges to 1.2115 Resistance as SNB Considers Going Negative

On Monday, we shared our fundamental and technical outlook on EURCHF, concluding that, “...the SNB may eventually be forced to enact further rate cuts or nontraditional monetary policy measures” to stave off deflationary pressures and that the pair may bounce to converging resistance at 1.2115 (see “EURCHF: The SNB Remains Resolute about 1.20 Floor” below for more). As it turns out, SNB comments and the price action over the last 48 hours have borne out this view, and we wanted to refresh the outlook and levels to watch ahead of next week’s highly-anticipated SNB meeting.

Comments from two high-ranking SNB officials have ignited speculation that the Swiss National Bank is likely to follow the ECB down the negative-interest-rate rabbit hole next week. First SNB spokesman Walter Meier reminded traders that “negative rate[s are] a conceivable option” in comments to Bloomberg earlier today. Shortly thereafter, SNB Alternate Board Member Thomas Moser quipped to the Wall Street Journal that negative interest rates have always been a possibility, adding that “We’re never shy about it…we always said we would use it if needed,” Though he refrained from speculating on whether the SNB would announce negative interest rates at next week’s meeting or a later date.

The SNB has a clear precedent for going negative, with the Danish central bank cutting its interest rate from 0.1% to -0.05% within a few hours of the ECBs decision. Much like the SNB, the Danish central bank explicitly prevents its currency from strengthening against the euro, leaving it no option but to follow the ECB into negative territory. With a trifecta of rising volatility in EURCHF, effectively no domestic inflation, and short-term European yields inching below comparable Swiss rates, the SNB seems likely to cut interest rates to negative territory to discourage inflows into its currency.

Technical View: EURCHF

As we noted earlier this week, 1.2115 is a critical area of resistance. This level represents the confluence of previous-support-turned-resistance, the 38.2% Fibonacci retracement of the May-Sept. drop, and the 50-day moving average. Rates surged into this area following the SNB’s comments earlier today, but sellers have emerged to push the pair back down from that barrier. Both the MACD and RSI indicators have turned sharply higher in the last few days, showing a bullish shift in momentum.

Moving forward, the market is likely to turn its focus to next week’s SNB meeting; if further comments suggest the SNB is likely to go negative, EURCHF could break the 1.2115 barrier and expose the 100-day MA and 61.8% Fib retracement at 1.2160. Meanwhile, even the central bank backs away from cutting rates, the pair may still find buying support ahead of the 1.20 floor near last week’s low around 1.2050.

Source: FOREX.com