EURCHF: The SNB Remains Resolute about 1.20 Floor

After one of the quietest summers in recent memory, volatility may finally be returning to the FX market. The first week of September brought bold easing actions on the part of the European Central Bank, increasing concerns about Scottish Independence, and a disappointing Non-Farm Payroll report, among other high-impact releases. In the wake of these announcements, the US dollar index surged to within striking distance of a 4-year high, EURUSD dropped to a 1-year low, and GBPUSD is currently trading down nearly 500 pips(!) from last week’s open.

One pair that hasn’t seen volatility explode yet is EURCHF, though rates did tick down to new 21-month low at 1.2045 last week. Of course, the ECB’s dovish posture is the driving force behind the broad euro weakness, but the EURCHF is in a bit of a unique situation. Switzerland’s inflation rate has dropped to just 0.1% y/y, and further strength in the Swiss franc could only exacerbate the risk of deflation, the last thing the Swiss National Bank wants to see. As a result, we believe that the SNB will maintain the EURCHF floor at 1.20 for the foreseeable future, providing support for the pair. From a fundamental perspective, the SNB may eventually be forced to enact further rate cuts or nontraditional monetary policy measures; at the very minimum, the central bank won’t hesitate to use its record-high war chest of FX reserves to defend the floor if EURCHF nears 1.20.

Technical View: EURCHF

On a technical basis, there are signs that EURCHF may turn higher this week. After finding support around 1.2050 the last two weeks, rates are inching higher early in today’s trade. Looking to the secondary indicators, the MACD has started to turn higher and is about to cross its signal line, while the RSI indicator carved out a clear bullish divergence in oversold territory at the recent lows, suggesting that the selling momentum is waning.

If we do see a bounce emerge this week, strong resistance looms at around 1.2115, which represents the confluence of the 16-month bearish trend line, previous-support-turned-resistance at 1.2112, and the declining 50-day MA. Meanwhile, any additional downside may be limited to the 1.20 level, as both traders and the Swiss National Bank are likely to step in and provide support as rates approach that floor.