The job of the Swiss National Bank has become increasingly tougher over recent weeks. Speculation of a Greek exit or ‘Grexit’ and continued flight of capital from Greece as well as other peripheral countries mean that there is more prospect of upside for the CHF than downside versus EUR. The EUR/CHF 1.2000 floor has not deterred investors from parking such capital in CHF, much to the chagrin of the SNB, which has even warned about implementing capital restrictions.
Elevated risk aversion means that inflows of capital to Switzerland from the Eurozone periphery will persist. As a result, EUR/CHF looks set to trade around the 1.2000 floor for some time to come, with the risk that the SNB increasingly has to buy EUR to protect the floor. My forecasts reflect the view that any CHF weakness versus EUR will be extremely gradual in the months ahead as I expect any improvement in risk appetite to be similarly slow.
On the economic front the arguments for CHF weakness have actually lessened. Consumer confidence increased to its highest in a year in April. More importantly from the point of view of the SNB, Switzerland has registered positive CPI readings on a monthly basis for the past three months. Unfortunately, CPI is still negative on an annual basis, meaning that deflationary concerns continue to persist. On balance, the SNB’s fears over deflation will eventually lessen, suggesting in turn that worries about CHF strength will also be pared back.
Although the CHF has remained strong against the EUR it has weakened against the USD, but this is attributable to EUR weakness (due to the EUR/CHF floor) rather than inherent CHF weakness.
It will not be a one-way bet lower against the USD for both the EUR and CHF. The speculative market is highly short both currencies and they could rally in the event of any good news from Greece or the Eurozone. The CHF may also find itself weakening against the EUR if the news is sufficiently good to help stem outflows of capital from Greece and other parts of the Eurozone, but I believe this is unlikely. For the next few weeks at least, ahead of Greek elections, EUR/CHF is set to continue to cling to the 1.2000 floor, with the market set to test the SNB’s resolve.