CHF: Independent weakness - HSBC

After the drama of July, analysts at HSBC expect the CHF to be more subdued in the coming weeks.

Key Quotes

“The extent of the weakness in the CHF during the late part of July was surprising and the upward momentum in EUR-CHF and USD-CHF was only interrupted by the “safe-haven” bid from geopolitical tension. Given the lack of any material change in Swiss fundamentals, this independent weakness of the CHF must reflect a shift in attitude among investors and the financial sector about the opportunities beyond Switzerland.”

“Part of the surge higher in EUR-CHF can of course be blamed on the strength of EUR-USD as the two typically move in tandem. But it was interesting to note that the CHF also depreciated against a generally retreating USD. Simply put, the appetite among holders of CHF assets to switch into EUR-denominated assets grew more swiftly than that of dollar-based investors. It is not clear why this relative story changed so much in late July. August has seen a more normal interplay between CHF, EUR, and USD return so far.”

“The weakness of the CHF will no doubt be welcomed at the SNB but it is likely far too early to expect any shift in central bank rhetoric. The trade-weighted CHF has depreciated 4% so far this year but it is still 6% stronger than when the EUR-CHF floor was in place. In addition, were the SNB to drop its assertion that the CHF is “significantly overvalued” it would likely prompt CHF buying, which is exactly what the SNB wants to avoid. So the next SNB meeting on 14 September will likely repeat the need for negative interest rates and the threat of FX intervention to keep the CHF in check. It is similarly unlikely that the market would anticipate any such change, which suggests little CHF action on this factor.”

“A return of geopolitical tension would reintroduce some CHF strength. Recently, subsequent to comments from the US administration that appeared to indicate an increase in tensions with North Korea, the CHF outperformed the JPY on the next trading day. Part of this may have reflected skewed positioning as the CHF had been heavily sold before the sudden pick up in risk aversion. Nonetheless, it showed that the CHF still has “safe-haven” allure even with the threat of SNB intervention looming. For now, such tensions have eased and the CHF “safehaven” bid also.”

“We expect EUR-CHF to move a little lower to 1.1200 in the coming weeks, in line with our forecast of a somewhat lower EUR-USD rate, but the moves are not expected to be large. USDCHF is likely to trade sideways as part of a wider consolidation.”