EUR/CHF is an attractive risk to reward trade as the big fundamentals point to more CHF strength ahead
“In the SNB’s last meeting in September, they hiked policy rates by 75 bps to 0.5%, exiting negative interest rates. Despite the move, markets were underwhelmed by the decision, as SNB President Jordan hinted at a possibility of full-point hikes after the ECB hiked by 75 bps.” (CITIBANK)
Interest Rate Expectations ECB V SNB
The SNB will continue to hike rates in line with or above the ECB and we agree with this statement: “We see upside risks to the SNB's policy rate path versus market pricing and believe that EUR/CHF will continue to drift lower.”(CREDIT SWISSE)
At their policy meeting today, the ECB hiked by 75 bps which was in line with forecast but there was a dovish tone to the statement. The statement noted the ECB would not give forward guidance on rate hikes and omitted language from the previous statement which indicated "several" rate hikes in the future.
SNB Intervention to Support the CHF
The SNB want a stronger CHF to contain inflation which is low by European standards and will hike rates to keep the CHF strong. The SNB has said it wants to keep the real exchange rate stable and it will intervene on both sides of the FX market. Translated this means the SNB wants to manage EUR/CHF lower.
Not being a member of the G20 means it can intervene in the FX markets and has huge FX reserves of CHF900bn so it can intervene against excessive Euro strength.
Other Bullish CHF Fundamentals
Finally, two more bullish fundamentals are the Swiss economy is in far better shape than eurozone and the CHF is also a safe haven.
We have seen the rally start to lose momentum and we view it as a sell with a stop behind the big 1.000 resistance level and think we will work our way down to daily support at 0.9500 then longer term expect a move down to 0.900.