With President Trump seemingly shaking up the conventional strong dollar policy, the markets are trying to figure out how it will work and who it will affect the most. It seems apparent that any country with a large current account surplus with the U.S. may get hit by Mr Trump’s ire.
Aside from those countries already attacked, there are smaller nations with major current account surpluses and we think Switzerland is particularly interesting. Specifically, EUR/CHF highlights how active the Swiss National Bank (SNB) has been in foreign-exchange markets recently.
On January 15, 2015, the SNB stunned markets by lifting the minimum exchange rate of 1.20 per euro, which had been in place for three and a half years. Since then, even though the bank does not officially comment on currency intervention, it is well known that the SNB is highly active in keeping the CHF strength down. Indeed, we note that the phrase "it therefore reaffirms its willingness to intervene in the foreign exchange market" appeared on SNB's web site nine times since March 2015.
Of course in this period of volatility and safe-haven flows, the SNB is stuck in something of a bind. Elevated equity markets should mean CHF is weaker all things being equal. And yet there is ongoing demand for the franc in market risk-off moves, no doubt due to the consternation of the SNB. In addition, stubbornly low core EUR inflation may continue to weigh on EUR/CHF.
Looking at the daily candle chart, the bearish outlook has strengthened considerably while prices keep below the December 30 high around 1.0763. Subsequent price action has hunted for the 2016 Brexit low of 1.0624, but has been rebuffed so far.
This battle between the SNB and the market will be fascinating. Factor in President Trump’s potential ‘soft’ dollar policy and things get even more interesting. 