Mounting uncertainty in Europe has driven investors back into CHF. This, after steady Euro appreciation and EUR/CHF reaching the psychological 1.2 threshold, after the Swiss National Bank shifted its comment from “highly overvalued” to “highly valued” and slowed its FX intervention. The CHF title of safe-haven currency marginally eroded as geopolitical and trade tensions limited effect on investor’s appetite for CHF.
Now CHF has become regionalized: the safe haven during European risks. This new reality was highlighted by CHF strengthening during Italian elections. The concentration of European risk in the current environment has sent EUR/CHF down to 113.98. The SNB is still ready to intervene if necessary. We doubt the SNB will stand in front of a European crisis to secure CHF, but where is the pain threshold: 112, 111, 110?.
Foreign exchange markets are in a full-blown risk off trading. Extreme market pressure on Russia and Turkey has spread fears of contagion. Over the next weeks markets will turn their focus on Italy. The new government is expected to provide a budget for 2019, indicating how closely officials would stick to their expensive spending promises. Any extreme unfunded deficit spending will add to domestic turmoil and conflict with the EU.
By Peter Rosenstreich