Swiss Franc Completes Reversal A Long Time In The Making

It was utter chaos in January, 2015: the Swiss National Bank (SNB) capitulated on its self-made 1.20 floor against the euro on EUR/CHF. The bottom completely fell out the currency pair and caused ripple effects around the world of forex. I barely traded the Swiss franc since then, specifically because of what I perceived as extreme central bank risk. I even stopped paying the Swissie much attention…until now.

Over three years later, EUR/CHF is FINALLY returning to that magic 1.20 level.

The Swiss franc has shown consistent weakness since early 2017. Against the euro, EUR/CHF has sprinted off 2018 lows.

A trip down memory lane: EUR/CHF has FINALLY just about erased all its loss from January, 2015.

The weekly chart above shows that the reversal of EUR/CHF has occurred in just two main spurts: the initial relief rally and the follow-on rally from the 2017 breakout. In between, the Swiss franc never mounted much of a display in strength.

The SNB has carefully curated and cultivated this weakness. Just this past Saturday, Thomas Jordan, the SNB Chairman, reiterated for the upteenth time that the SNB has no imminent plans to back off its ultra-easy monetary policy. From Reuters:

…it [is] not yet the time to change to change monetary policy,’ Jordan told Swiss newspaper La Liberte in an interview published on Saturday. ‘Such a change would be premature,’ he said. ‘We do not want to provoke an appreciation of the Swiss franc.’ Jordan said the economic situation had improved from a year earlier, but Swiss inflation still remained very low. ‘The situation remains fragile in the foreign exchange market,’ Jordan said.

Here is what the SNB had to say a month ago during its last pronouncement on monetary policy where it left its policy rates at rock bottom levels: interest on sight deposits at –0.75% and the target range for the three-month Libor at between –1.25% and –0.25%.

The SNB will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration…

The Swiss franc remains highly valued. The situation in the foreign exchange market is still fragile and monetary conditions may change rapidly. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential. This keeps the attractiveness of Swiss franc investments low and eases pressure on the currency.

At the same time, the SNB projected inflation to reach a healthy 2.0% level by 2020 with a breakout starting in earnest around mid-2019. The SNB is truly serious about keeping the Swiss franc unattractive.

With the 1.20 milestone within reach, I noticed the US dollar just broke out against the Swiss franc. USD/CHF popped above resistance at its 200-day moving average (DMA) for the first time in 3 months. The run-up corresponds with a steady recovery from the oversold conditions in the US stock market.

USD/CHF has steadily recovered off the February lows to achieve the current 200DMA breakout.

With this picture, I decided to dip my toe back into the waters against the Swiss franc with a very small long position on USD/CHF. I am bracing myself because the volatility index, the VIX, at a key pivot level and trading well below its lower-Bollinger Band (BB). If the VIX manages to continue downward, I expect USD/CHF to continue higher smoothly. A quick snapback will likely drive USD/CHF back down, but I think such a move will provide a good opportunity to increase my USD/CHF position and better profit from overall weakness in the Swiss franc.

The VIX, is trading well below its lower-Bolling Band (BB) on yet another rendezvous with its 15.35 pivot line.

Be careful out there!

Full disclosure: long USD/CHF