We talked a ton about the Swiss franc this week.
And with good reason. For those who missed it, you can review some of our posts here and here, but suffice to say EURCHF blew through 1.12 for the first time since the SNB abandoned the floor, on its way to 1.13 and beyond:
By the time the smoke cleared, the franc had plunged 3% on the week:
Generally speaking, this is the market pricing in a more hawkish ECB. Recall this from Bloomberg’s Anchalee Worrachate:
The SNB’s ever-dovish stance on the currency and Swiss economic stagnation versus the euro area’s improved economic outlook (not to mention, less political uncertainty) probably helped push EUR/CHF to the highest level since January 2015 — when the central bank removed its franc cap. The pair’s advance above its 200-week moving average for the first time since pre-GFC in 2008 offers an excuse to liquidate long CHF positions in a summer-thinned market. Some market participants I spoke to have also noted a desire among Swiss investors to seek higher yielding assets abroad, adding to the downside pressure on the currency. All this makes the CHF a bit of a sitting duck against the euro, and the SNB is probably okay with that.
That was underscored on Friday when the latest CPI data out of Germany added fuel to a fire that started hours earlier in Tokyo where Japanese banks were said to have ‘inadvertently’ triggered stops and accelerated the EURCHF rally. Here’s an annotated visual for that:
Well, things are set to get still more interesting in the week ahead, especially considering that this could start to have an effect in the front-end of the German curve.
“The acceleration of the euro against the Swiss franc may trigger some paring of short-dated European government bonds by the Swiss National Bank and is something to be mindful of on a multi-big figure extension higher in the currency pair,” Bloomberg’s Tanvir Sandhu notes, adding that “the SNB is set to release its 2Q currency allocation data on Monday.” So watch that for clues.
On that score, you should also note what probably happened as markets became more nervous about the possibility of a Marine Le Pen victory in France (see the second chart above). If you look back, the franc had jumped nearly 2% in the six month period through March (so, in the six months heading into the French elections).
If the SNB was intervening over that period, the supply of francs rose.
“The general trend is driven by the excess supply of Swiss franc,” Thomas Flury, global head of currency strategy at UBS, told Bloomberg in an email. “The SNB’s interventions before the French elections led to quite a strong increase of Swiss franc money in the system. Risk assessment has fallen drastically since then. It took some time for this money to become visible on the exchange rate, but now it is.”
This is likely going to be the main event in FX this week. As noted above, if the SNB gets comfortable with the “natural” (as opposed to engineered) weakness in the franc, it will mean they don’t have to intervene. And as the quotes from Tanvir Sandhu (above) suggest, that means Schatz yields could be pressed higher.
We’ll leave you with this from Cameron Crise:
The Mystery of the Swiss in the Night
EUR/CHF remains an object of intense interest for FX punters. I have fielded more enquiries about what’s going on this week than I have the rest of the year combined. Some snooping has yet to yield a particularly satisfactory answer, but what’s evident is that the past several days have seen some CHF sell programs initiated around 5 am NYT (10 am London). The rally in Asian hours is purely a function of a stop fest going off. What makes it all interesting is that the cross is set to close above its 200-week moving average for the first time since late September 2008. That’s quite remarkable and certainly suggests a sea change.