Thought of the day
27.07 - Swiss franc rolls over
Since the initial volatility spike after the Swiss National Bank's (SNB) abandonment of the EURCHF floor 15 January 2015, EURCHF has been confined to a relatively tight range – trading within a 3% band between August 2016 and April 2017.
But greater Eurozone optimism and a more hawkish European Central Bank (ECB) have pushed EURCHF out of this range, rising to 1.1246 on 27 July, the franc’s weakest level against the euro since the floor was abandoned. We see further franc weakness ahead:
- The Swiss franc is in less demand as a safe haven, with key risk events like the French presidential election resolved, and investors showing less concern about geopolitical risks.
- There is excess Swiss liquidity. The SNB's balance sheet is equivalent to 116% of GDP, compared with 24% for the US, and 21% for the UK.
- The Swiss economic recovery is lagging the Eurozone. First-quarter Swiss GDP rose by 1.1% year-on-year and annualized Swiss CPI rose 0.2% in June – versus Eurozone GDP growth of 1.9% and CPI of 1.3%, respectively.
- The Swiss currency is overvalued on a PPP basis, which we estimate at 1.21 versus the euro. This week the SNB stated that the franc remains significantly overvalued despite the recent depreciation versus the euro.
So, we think the sell-off has further to run. We prefer the euro over the Swiss franc, a position introduced earlier this month, with a six-month EURCHF target of 1.14.