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Jane Foley, senior FX strategist at Rabobank, notes that the news that the SNB’s sight deposits jumped the most in two years last week provided a strong signal to the market that the central bank had intervened in the FX market to offset CHF gains.

Key Quotes

“This is not a huge surprise since the SNB makes it very clear that its maintains FX intervention (and the threat of it) as a policy tool. So far, August has been defined by a surge in demand for safe haven assets.”

“The CHF has been gaining ground vs. the EUR since late April. This may partly be attributable to a pick-up in expectations about the prospects of further forthcoming policy easing by the ECB.”

“In response to the general increase in demand for safe haven assets, last week net positions in the JPY climbed into positive territory for the first time since late 2016. By contrast, not only did net speculators’ CHF positions remain in negative territory, but net shorts increased last week.”

“Given the weight of bad news and the accommodative policy bias of the ECB, the SNB could struggle to weaken the value of the CHF in the coming months. CPI inflation in Switzerland remains extremely low, at 0.3% y/y in July. Clearly, the risk of further currency appreciation would be problematic to the central bank given its mandate “to ensure price stability, while taking account of economic developments”.   As a consequence, speculation is building that the SNB may cut its policy rate at its September policy meeting, despite this already being at -0.75%.”

“There is little doubt that the SNB will continue to hammer a bearish drum going forward. That said, as long as demand for safe haven remains heightened, the SNB will be in fire-fighting mode. The optimal backdrop for an effective policy pass through for the SNB would be strong and stable growth in the Eurozone and a return to healthy levels of risk appetite. In the absence of this the outlook for the CHF will be dominated by safe haven demand. We see scope for the CHF to lose a little ground vs the JPY in the coming months, but expect EUR/CHF to creep down towards 1.07 on a 3 to 6 month view.”