EUR/CHF finally managed to break somehow the 1.10 resistance to the upside yesterday. However further gains are needed to clear the way towards 1.11. The general environment for EUR/CHF has improved substantially since the French Presidential election and the many setbacks faced by populist movements across EU members overall, allowing to reduce buying pressure on the Swiss franc. This also helped return confidence to investors and translated into a yield rally that allowed German 10-year to climb back into positive territory.
Nevertheless, the prospect of the ECB reducing its Quantitative Easing program was the most significant driver recently. It gave a fresh boost to European yields and fuelled the EUR/CHF rally as investors moved to higher-yielding currencies. However, the excess cautiousness of the ECB together will faltering inflation pressures will keep investors in their toes until the next ECB meeting on July 20.
We remain constructive on EUR/CHF and believe there is room for further appreciation of the pair. However, investors should remain cautious and especially not create unrealistic expectations about an abrupt unwinding of the ECB’s monetary policy. Mario Draghi will take it slow, as usual.
By Arnaud Masset