Fundamental Forecast for Swiss Franc: Bearish

- Swiss National Bank intervention looms for Swiss Franc
- View our Monthly US Dollar/Swiss Franc Exchange Rate Forecast

The Swiss Franc finished the week almost exactly unchanged against the US Dollar, but its steady decline against the Euro increases the risks of Swiss National Bank currency market intervention. The Euro/Swiss Franc exchange rate has been on a downward trajectory since the SNB aggressively defended the SFr 1.5000 mark on June 24. CHF strength subsequently prompted SNB Chairman Jean-Pierre Roth to reiterate the central bank’s resolve to prevent further Swiss Franc appreciation. Yet markets paid little attention to his comments, and traders were seemingly content in pushing the EURCHF ever closer to the 1.5000 mark. Such defiance sets the stage for yet another SNB showdown, and it will be critical to watch when and if the central bank once again sells Swiss Francs in order to protect against EURCHF weakness.

SNB commentary virtually guarantees further FX market intervention, and it seems that forex options traders are gearing up for further EURCHF rallies. Indeed, 1-Week options show that options markets are paying noteworthy premiums for out-of-the-money EURCHF calls—aggressive bets that the currency pair will appreciate. Thus the question remains: if traders are gearing up for EURCHF strength, why would anyone buy Swiss Francs against the Euro?

We would argue that speculators are very unlikely to be the ones selling the EURCHF as it nears the crucial 1.5000 level. Instead, the exchange rate’s persistent downtrend seems a function of fundamental market forces. Such demand could potentially come from investors looking for the safety and stability of the Swiss currency. Given massive financial market headwinds, we believe that such CHF buying interest will likely continue through the foreseeable future. This leaves FX markets at clear odds with Swiss monetary policy authorities, and one has to wonder whether the SNB has the patience and the firepower needed to sustain its attempts at controlling its exchange rate. We certainly don’t know the definite answers to any of these questions, but we believe we are likely to see aggressive EURCHF buying in the week ahead. Our proprietary retail speculator positioning figures show that EURCHF long positions outnumber shorts by a whopping 5.5 to 1. We clearly are not alone in our forecasts for Euro strength against the hobbled Swiss Franc.

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