EUR CHF Forgotten FX pair may come back to life

The EUR/CHF has been a forgotten currency pair, but is the worst days behind it now? The franc has been stubbornly strong against the euro. But with the ECB’s next policy move likely to be to reduce accommodation, the rate differential favours a recovery in EUR/CHF. Trouble is, there’s significant political risks facing the Eurozone in the coming months and that may keep a lid on the euro and support the perceived safe-haven Swiss franc. Nevertheless, the Swiss National Bank stands ready to intervene if the franc appreciates further.

Indeed, with inflation being non-existent in Switzerland, the SNB is likely to keep its monetary policy extremely accommodative for the foreseeable future. The next SNB meeting is on Thursday March 16. There is a small possibility that it may loosen its policy further and/or introduce its own QE stimulus programme to fight off deflation. But we don’t see this happening at this meeting, though the franc may weaken anyway on the back of dovish comments from the central bank’s president Thomas Jordan.

On Thursday, the ECB delivered its own policy statement and press conference. ECB President Mario Draghi re-iterated that QE is likely to stay in the Eurozone at least until the end of the year, even if the ECB forecasts stronger growth and inflation rates over the next two years. But the euro rose as Mario Draghi hinted at the Q&A session that further policy action is less likely because deflation risks have receded. So, on balance, the ECB was slightly less dovish and more hawkish than expected, as adding to policy accommodation appears less likely. If the euro has any chance of coming back, its best bet would be against a weaker rival, although even against stronger currencies it has been doing okay in recent days.

Given the above fundamental backdrop, the EUR/CHF may strengthen in the coming days and weeks. Technically, the bearish trend is still intact, though the recent break above short-term resistance in the 1.0680/90 area means we have a short-term higher high. If the EUR/CHF goes on to break 1.0750 resistance then it may start to move more noticeably higher, possibly towards 1.0815 and 1.0900 bullish objectives initially. Conversely, a break back below the 1.0680/90 level would expose the prior lows around 1.0630 for a re-test.

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