CHF: Looking At Bund; Towards Fair Value - Nordea

CHF: Looking At Bund; Towards Fair Value - Nordea

27 April 2016, 13:08
Vasilii Apostolidi
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Rate rise pending – should push CHF weaker

The “key factor” to push EUR/CHF up above 1.10 will be a proper rise in global yields. As the longer rates came back up, so did the EURCHF over the past month. 

 

Global yields were pulled lower early this year by growth fears (the US and China) as well as general uncertainty about risk sentiment, which has kept the CHF under strengthening pressure. But we have observed a wind of change lately, with stocks erasing year-to-date losses and commodity prices exploding. The puzzle is that this hasn’t translated into higher long yields yet. As outlined in the outlook for CHF, the rise in global yields is the ultimate factor to push the CHF weaker. Indeed, last year EUR/CHF bottomed and moved up as the Bund yield exploded higher. Will we see the same this year?

Is SNB active?

There have been a lot of rumours that the SNB is on the wire buying the EUR lately. Looking at sight deposit data, indeed there has been an increase in sight deposits – the CHF liquidity the banks hold with the SNB. But so far intervention, if any, has been limited in contrast to crisis episodes. So, stealth intervention in the direction of the market move, but not the market driver.

If needed, the SNB can do more. The SNB is willing to accept a higher level of liquidity as the housing market has been cooling with money supply growth. With its inflation forecast at -0.8% y/y, the bank has enough reason to intervene to protect higher EUR/CHF levels. The 1.0750 level is critical (last time rumoured to have seen an aggressive SNB).

Whatever ECB does

Looking at rates, EUR/CHF is still running with tailwind. The market prices in an 8bp cut from the ECB, and even if that materialises, CHF deposit rates will remain well below EUR deposit rates (40-50bp). So, basically the SNB doesn’t have to act on the rates side to push EUR/CHF higher. But it is ready to – if needed – judged by its recent rhetoric.

 

Towards fair value

We still aim for a move to 1.12 in EUR/CHF in the coming few months, basing it on improved risk sentiment and higher global yields ahead. “Normalisation” both in financial markets and the global economy is key to bringing the CHF towards “fair value”, which is by almost any measure more than 10% away.

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