Oliver Harvey, Macro strategist at Deutsche Bank, notes that the Swiss sight deposit data suggested another sharp pick-up in intervention from the SNB last week, with an additional CHF 4.5bn of franc liquidity created after an increase of over 7bn in the previous fortnight.

Key Quotes

“1.06 appears to be the new unofficial floor for the central bank, but we don’t see a defense of this as sustainable.”

“First, the fundamental reasons for franc appreciation remain strong. Latest data show that Switzerland’s broad-based balance has now moved into positive territory on an annualized basis. A lack of domestic outflows remains the source of marginal CHF demand, with Swiss purchases of foreign debt retreating back to zero and equity outflows almost as subdued. Our cross border M&A monitor also shows a big pick-up in cross-border inflows so far this year. There is a limit to how far the SNB can continue to recycle the current account surplus given costs to the banking sector are rising and deflationary pressures easing. Swiss CPI at last turned positive in January.” 

“Second, European political risk may return to haunt the SNB. Peripheral spreads have widened in anticipation of French and Italian elections and the close relationship between these and SNB intervention over the last two years suggest that investors concerned about euro redenomination risk continue to see Swiss assets as a safe-haven. This is also being reflected in the options market, with the three month EUR/CHF risk reversal falling sharply in recent weeks to levels previously associated with periods of major Eurozone stress.” 

“Finally, the trade still seems lightly owned. Despite the move in the risk reversal, speculators remain short according to IMM positioning (albeit shorts were pared significantly last week), probably reflecting CHF’s use as a funding currency for carry trades.”  

“In sum, selling EUR/CHF remains one of our favorite trades, and would also benefit from rising Eurozone political risk premia. Stay short, targeting parity.”

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