Close Long EUR/CHF Recommendation

Strategy
Today’s weekly sight deposit figures revealed that the SNB did not intervene last week despite a continued fall in EUR/CHF. Thus, it no longer seems that a first line of defence for CHF strength is intervention as we have previously argued. Rather, as we noted in Flash Comment: SNB keeps hands off rates – but keen to touch CHF still, 19 March, although the SNB still reserves its right to use intervention to steer the Swissie weaker, the central bank seems rather complacent regarding the ability of the current level of negative policy rates to fight off CHF inflows. Thus, we are now much less convinced that the SNB will react as consistently to EUR/CHF dives, i.e. we based our recommendation largely on an SNB put being in place.

Crucially, we look for omnipresent EUR weakness to continue in the coming months, so we maintain our call for SNB to deliver a 10bp rate cut to both the Libor target range and sight-deposit rate at the June meeting. However, near term, we fear that EUR downside will not be effectively capped by the SNB. As a result we close our recommendation to buy EUR/CHF (see Danske Bank FX Trading Portfolio: Buy EUR/CHF, 27 March).

Fundamentals
Longer term, we remain fundamentally bullish on EUR/CHF but the Swissie is now subject to much less predictable SNB policy moves. However, we do believe the SNB will do more (rate cuts, intervention and/or set an asset-purchase target) to match the ECB’s QE. With inflation falling further, the SNB has an increasingly hard task justifying the significantly overvalued CHF, which pushes import prices lower and challenges the export sector significantly. The cross should be in for a turn later in the year when a EUR recovery materialises and the SNB keeps rates firmly negative and continues to signal its will to intervene to fight the well-established Swiss deflation issue. Thus, we still target 1.10 in 12M.

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