Pressure Mounting on Swiss Franc

Andamento del mercato - 04/03/2015

As the Euro continues to tick lower against peers, the one rate that has remained relatively stable is the EURCHF pair thanks to the Swiss National Bank’s exchange rate support mechanism. Although the Swiss dropped the hard 1.2000 EURCHF peg back in January, they have since resorted to targeting a softer peg in the pair between 1.0500-1.1000 in an effort to maintain the Franc’s competitiveness. So far the measures have paid off as evidenced by the latest GDP figures from Switzerland, but that all might change in the next quarter as the impact of a stronger Franc hampers efforts to grow the economy. These activities are costly and losses in the Euros purchased by the Swiss Franc to offset strength could backfire if any steep losses occur. The SNB’s balance sheet would take a large write-down if such an event occurred owing to the gargantuan size of the balance sheet. Although the nation has ample gold and foreign currency reserves, this policy cannot last indefinitely.

 

EURCHF has bounced dramatically after dropping nearly 30% of its value before correcting higher following the peg abandonment. Since then, the soft target of the SNB has seen the EURCHF pair largely range-bound between 1.0630 and 1.0800 for the last two weeks. However, it looks like downside might be in store for the pair as momentum carrying EURCHF higher sees the upward bounce fade. With the pair failing on a technical basis to put in new highs coupled with the persistently weakening Euro, the probability of EURCHF retesting 1.0500 is high with the uncertainty ahead for Greece. This shift in the trend could spell trouble for the SNB as it seeks to keep the Franc competitive in global markets.

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