EUR/CHF: Changing times? – Rabobank

For many years, the thorn in the side of Swiss policymakers has been the continued strength of the CHF vs. the EUR and Jane Foley, Senior FX Strategist at Rabobank, would argue that this has had as much to do with weak Eurozone fundamentals as it does with strong Swiss ones.

Key Quotes

“Last week SNB President Jordon repeated that the central bank’s negative rates and intervention pledge were necessary to make the franc less attractive to investors.  According to the OECD’s measures of purchasing power parity, the CHF is currently 34% overvalued vs, the EUR.”

“In an environment in which investors are chasing yield rather than safe haven, the implication is that the SNB shouldn’t need to try as hard to deter inflows into the CHF.  If the SNB indicates that it will maintain its aggressive policy settings for longer than the ECB, EUR/CHF should be bias higher.”

“In terms of what defines a safe haven, Switzerland arguably has the best fundamentals of any nation.  The country runs a large current account surplus and only a small budget deficit.  There is political stability in Switzerland and a strong judiciary.  There is also a good level of liquidity in the CHF.  To offset the attraction of the currency, the SNB has been maintaining its aggressive policy of intervention threats and negative interest rates for a prolonged period.   These policies come with unwanted side effects.  In Q4 2016 household debt in Switzerland reached an all-time high of 128.4% of GDP.  This ratio has trended higher since 2009 when it stood close to 105% of GDP.  According to OECD data, household debt as a percentage of net disposable income in Switzerland is only exceeded by Australia, Norway, Netherlands and Denmark within the OECD group of countries.  The very high levels of household debt, which has been encouraged by low interest rate settings, is now being linked with soft growth in domestic consumption.”

“Although the SNB has utilised countercyclical capital buffer to control the imbalances in the household sector, there is a strong argument in favour of moving away from negative rates.  This, however, is inconceivable given the strength of the CHF.”

“Looking ahead, any indication that the ECB may be prepared to reduce its policy accommodation will provide the SNB will a little more control over its own policy.  While it is still too early to expect any change in rates from the SNB, a break may be appearing in the clouds.  Meanwhile stronger risk appetites suggest there is scope for the CHF to underperform both the EUR and also CEE currencies.  We would look to buy EUR/CHF on dips towards 1.085.  The May high near 1.0987 is likely to provide resistance.”