Chart of the day: Risk event: A pivotal point for CHF traders
It seems we are seeing an interesting development playing out in EURCHF, as the forex pair finds a strong floor just above 1.05. With January 2015 still fresh in many traders’ minds, and the moment the SNB pulled the rug from under the 1.20 floor - the current scenario raises serious concern of a painful rollover and slippage through stop-losses.
Hourly chart: EURCHF has found a strong floor at 1.0515. Chart source data: Metaquotes MT5.
Prior to 2015, the Swiss National Bank (SNB) limited CHF strength to €1.20 with FX intervention. While nothing has been formally announced, it looks like 1.05 could be the new 1.20, with price finding a strong floor at 1.0515. The SNB haven’t said they’re doing anything, but the evidence is compelling.
The question here is how long this will last. There is considerable downward pressure on the euro and will be for some time yet, meanwhile adverse economic conditions favour the CHF strengthening on safe haven flows. This can only be exacerbated if equity indices like the DAX (GER30) and S&P 500 (US500) start to roll over again and volatility rises.
The Swiss National Bank (SNB) seems to have stepped up its FX intervention measures since March. See the explosion of SNB sight deposits on the chart below. These are seen as a vehicle for currency intervention, whereby the SNB prints CHF and offers it to local banks in return for euros. This increases CHF supply and keeps price artificially low.
Swiss National Bank (SND) sight deposits, 2015-2020. Deposits have escalated since March this year. Source: Bloomberg
A break of 1.0515/00 won’t be a 2.0 to the 2015 CHF crash but it could cause a good 50-100 pip move. This could cause a stop-loss run, which could lead to slippage, with price running through the desired stop loss. The risk applies to all CHF pairs, not just EURCHF.
EURCHF price during the 2015 CHF crash. Source: Bloomberg
Limited reasons to hold euros
The euro is looking persistently weak as divisions deepen in the European Union. Countries devastated by the pandemic are furious with the more fiscally conservative northern bloc (think Germany, Austria, the Netherlands) for withholding the level of economic relief they’re calling out for. President of France Emmanual Macron has warned the EU “faces collapse” if stronger joint action, perhaps in the form of debt-mutualisation, cannot be reached.
Add to this that German courts ruled against the European Central Bank’s (ECB) bond-buying program in its current form, and the rift runs deeper.
The political backlash will play out later, but when you consider dampened EU growth pre-pandemic and that the euro finds strength in unity across the bloc, it seems there’s very little reason to hold euros right now.
So if sentiment starts to roll over again, if the GER30 and US500 sell-off, if the VIX kicks above 40% again, there’ll be far more pressure on EURCHF to push lower.
This pair is more than ready to fall... if the SNB permits it.
EURCHF extends two-year downtrend, eyes support at 1.0400
Disagreement between EU nations on crisis relief measures is weighing heavily on the euro, which has weakened markedly against the Swiss franc (CHF) over a two-year downtrend.
The EURCHF pair also offers a cleaner read on the euro than the more popular EURUSD, which is subject to volatile swings due to the US dollar’s role as the world’s primary reserve currency.
A weakening euro has seen EURCHF hit an almost five year low after a gruelling downtrend that’s weakened the Swiss franc from €1.20 to €1.05 since 2018. EURCHF has moved sideways since its low at 1.0508 on Thursday, hesitant to push below 1.0500, but the long term downtrend is hard to ignore, especially as CHF maintains safe-haven bids. A close below 1.0500 paves way to well-established 2015 support at 1.0400.
With a raft of EU data releases this week, the euro could make some choppy moves over the next few days. You can prepare yourself with our economic calendar, and filter results to Europe only. Remember, even though China Q1 GDP printed below expectations on Friday (-6.8% vs -6% expected), CNH as well as global equities strengthened on the day. Markets, for now, are of the belief that the worst is over.
The key event for me this week is the virtual EU summit on Thursday, where traders will be watching for further discussion of joint-debt issuance through so-called ‘coronabonds’. Fiscally conservative northern countries like Germany and the Netherlands have resisted debt mutualisation, causing a rift between economies like Italy and Spain crippled by the pandemic. The disagreement threatens to fracture the EU, which is bad news for the euro. Joint debt issuance would ease the populist backlash from crippled economies, and reduce risk of one economy’s woes rippling across the Eurozone.
CHF strength, SNB response
Until 2015, the Swiss National Bank (SNB) kept a cap on CHF strength, limiting the Swiss franc to €1.20. Since the policy was scrapped, the CHF has traded between 1.05 and 1.20 per euro.
The SNB stepped up its FX intervention measures in March, increasing its holdings of foreign currencies, increasing supply of CHF in turn, in an effort to limit CHF strength.
Deposit rates are already negative at -0.75%, a rate that has held steady since 2015. It’s unlikely the bank would be compelled to cut rates deeper into negative territory, which would further hurt bank profit margins. Consensus expectations see the rate holding at -0.75% for the rest of the year. The European Central Bank (ECB) similarly has not taken rates deeper into negatives despite the crisis, and has instead ramped up its asset-purchasing program.
I’d expect the SNB to hold fire, hoping the euro will find a bid on fiscal relief and easing lockdown restrictions as the virus-curve flattens.
A rift between EU nations grappling with a recovery tilts the long-term outlook for the euro to the downside. There’s been a lack of coordination in fiscal responses to the downturn, and much bigger disagreements on how to support economies crippled by the virus like Italy and Spain. Fiscally conservative northern nations have resisted calls for joint EU ‘coronabonds’, not wanting to share the debt burden from the more profligate south.
The agreement reached so far by EU leaders permits a member nation to borrow up to 2% of its GDP through the EU stability mechanism for healthcare costs only, and not the resulting economic downturn. Countries that suffer the most will pay back the most. Italy finds the measure unacceptable.
The political backlash will playout later, but French President Emmanual Macron has warned the EU faces collapse if joint action cannot be taken. Similarly, Italian Prime Minister has warned of a domino-effect through connected EU economies if ravaged economies aren’t rescued with joint coronabonds.
Remember, the euro’s strength is found in coordinated policy to ensure business and consumer confidence across the bloc, creating opportunities for the global economy. History has shown that if the rift runs deep, the EU will be fractured and face the risk of a populist backlash, an unsettling outlook for the shared currency.
Chart of the day: The support level that could trigger a CHF buying spree
The Swiss franc (CHF) is emerging as the coronavirus safe haven currency after the Japanese yen weakened considerably last week, foregoing its usual safe haven status.
As the euro continues to weaken, we’re watching the downtrend in EURCHF, which has flattened at the 1.06060 level and will trigger a CHF buying-spree when it breaks support.
The CHF is the only G10 currency to have outperformed the USD over the past week. This is happening despite the Swiss National Bank’s (SNB) stimulatory efforts to minimise its strengthening against the weak euro. Further, the SNB’s interest rate is -0.75%. The US Federal Reserve has considerably more room to ease with a rate target of 1.5 - 1.75%.
Switzerland’s SNB is on the US Treasury’s watchlist of currency manipulators. It must proceed with caution to avoid antagonising the Trump administration. Cutting rates further instead of directly intervening would keep them in Trump’s good books.
Then consider the coronavirus risk emerging in Italy, which looms on the already weak euro. Italy has confirmed at least 150 cases and put 50,000 people across several small towns into quarantine. With virus risks and comparative easing prospects, the circumstances are tilted in favour of CHF strengthening.
Price trend remains within the boundaries of the channel that started on 2 December, however, the last eight candles have taken a notable consolidation with price moving sideways. Hovering at support at the 1.06060 level, the pair has little support below here, having been lower only once for a brief four months in H1 2015. A break of support here and EURCHF falls further as CHF buy orders kick in, bolstering the sell-off. One to watch.