Is Switzerland on President Trump’s hit list?

With President Trump seemingly shaking up the conventional strong dollar policy, the markets are trying to rationalize how this will work and who it will affect the most. It seems highly apparent that any country with a large current account surplus with the U.S may get hit by Mr Trump’s ire.

Aside from those countries already attacked, there are smaller nations with major current account surpluses and we think it’s interesting to take a look at Switzerland. More specifically EUR/CHF highlights how active the Swiss National Bank (SNB) has been in foreign exchange markets recently.

On 15 January 2015, the SNB stunned markets by lifting the minimum exchange rate of 1.20 per euro which had been in place for three and a half years. Since then, even though the bank does not officially comment on currency intervention, it is well known that the SNB is highly active in keeping the strength of the CHF down.  Indeed, we note that the phrase ‘it therefore reaffirms its willingness to intervene in the foreign exchange market’ appears nine times from March 2015 on the Chronicle of Events on the SNB’s website!

Of course in this current period of volatility and safe haven flows, the SNB is stuck in somewhat of a bind. Elevated equity markets should mean the CHF is weaker all things being equal. And yet, there is ongoing demand for the Franc in market risk-off moves, no doubt to the consternation of the SNB. In addition, stubbornly low core EUR inflation may continue to weigh on EUR/CHF.

Looking at the daily candle chart below, the bearish outlook has strengthened considerably whilst prices keep below the 30 December high around 1.0763. Subsequent price action has hunted for the 2016 Brexit low of 1.0624 but has been rebuffed so far.

This battle between the SNB and the market will as always, be fascinating. Add in Mr Trump’s potential ‘soft’ dollar policy and things get even more interesting.