CHF: Good and bad news - Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, the drop in the value of the CHF can be linked with the ultra-accommodative monetary policy settings of the central bank, though the quickened pace of EUR/CHF appreciation recently suggests that other factors have also been at play.

Key Quotes

“It currently appears likely that the SNB will be the last G10 central bank to start normalising policy. In its March 15 monetary policy assessment, the SNB repeated that it is “maintaining its expansionary monetary policy, with the aim of stabilising price developments and supporting economic activity”.  Not only does this mean negative interest rates but the SNB “will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration”.  Within the G10 universe, the SNB is unusual in referring to FX intervention as a policy tool.”

“The fact that the US Treasury has concluded that no country currently meet the standards for currency manipulation in some respect means that a blind eye is being turned on the SNB’s policy.  This can probably be explained by the fact that the CHF remains extremely overvalued.  This supports the SNB’s position that its policy is a defence of its economy rather that a blatant attempt to enhance its export position.”

“According to the OECD’s measure of purchasing power parity, the CHF is currently around 36% overvalued vs. the EUR and about 23% overvalued vs. the USD. The impact of the strong CHF is very evident in Switzerland’s low inflation rate.  CPI inflation rose to 0.8% y/y in March but last traded above the 2.0% y/y level back in 2008 – and then only briefly.  We have frequently argued that on paper the CHF is the best safe haven currency in light of its healthy budget and current account positions and decent liquidity.  Given its safe haven status, much of the strength of the CHF in recent years has been a function of non-domestic influences such as the global finance crisis and more specifically the Eurozone debt crisis.”

“Back in 2014 it widely reported that the plunge in the value of the RUB on the back of sanctions led to strong Russian demand for the CHF.  In recent weeks a reversal of these flows has been reported as a reason for the accelerated falls in the value of the CHF.  This could be related to speculation that western governments will increasingly target Russian money to enhance the impact of the latest US sanctions.  The Russian government has also taken steps to create more favourable conditions for repatriation.”

“As a consequence of the recent upward spurt, EUR/CHF has hit our 1.20 target sooner than expected. Given the CHF’s safe haven characteristics, an improvement in risk appetite should be a pre-requisite of a drop in the value of the CHF.  This helps explains the uptrend in EUR/CHF last year.  Although further Russian repatriation would continue to support EUR/CHF, the loss of momentum in Eurozone growth, higher US interest rates and fears of trade wars are all conducive to a weakening in risk appetite.  This implies that the pace of gains in EUR/CHF going forward should be capped.  We expect EUR/CHF to be centred on a range around the 1.19/1.20 through the remainder of the year.”