Themes: reverting back to type as risks become localised. We have highlighted how the CHF is no-longer the “go-to” currency during recent bouts of global market volatility. This view has been driven in large part by the deterioration in Switzerland’s balance of payments situation with the basic balance (current account balance adjusted for capital flows) falling into negative territory in Q3 2015. However, we have been cognizant of the risks of safe haven inflows into Swiss assets as a result of any shocks within close geographical proximity to Switzerland.
We would expect to hear more about such inflows from the SNB board in the coming weeks as this has been a key focus in explaining the lack of appreciative pressures on the currency during recent bouts of global market volatility. The sell-off in European bank stocks, widening European credit spreads and mounting concerns over solvency and funding of the banks have provided the catalyst for renewed focus on CHF. The widening of the FRA/OIS spread in particular since the start of the February (a sign of growing European funding/solvency concerns) has been the precursor to the rebound in CHF whilst European peripheral spreads are now at their widest since the start of 2014. This increase in localized risk is posing upside risks to the nearterm CHF outlook.
Forecasts: no changes. Though CHF has staged some recovery in recent weeks, we remain medium-term CHF bears based on our framework of overvaluation and deteriorating external fundamentals, we see risks for further near-term gains as global risks become increasingly regionalized but refrain from making any immediate forecast changes to EUR/CHF.
Risks: increased localized risks. A further intensification of the European banking crisis which leads to concerns about liquidity and solvency could lead to a more precipitous rally in CHF triggering sizeable safe have inflows into the country. This would undoubtedly trigger an SNB response as recent comments have suggested.
BofA targets EUR/CHF at 1.09, 1.10, 1.11, and 1.11 for the end of Q1, Q2, Q3, and Q4. BofA target USD/CHF at 0.99, 1.02, 1.06, and 1.11 over the same periods of time.
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