Date: 09 Nov 2017
As analysts at the Netherlands’ Rabobank noted earlier in the week, even though the Swiss franc has depreciated some 9 per cent versus the euro (EURCHF) since the spring “according to the OECD’s calculation of Purchasing Power Parity (PPP), the CHF is still 42 per cent overvalued vs the EUR.” Yet, as traders will recognise, even if the OECD’s calculation is correct the market doesn’t just judge the value of the Swissy through the prism of PPP as the Swiss franc has (and in all likelihood will continue to have) a safe haven cachet. In short traders won’t be holding their breath waiting for that perceived 42 per cent undervaluation to be unwound. But that doesn’t mean to say the Swissy couldn’t grind lower versus the euro, assuming of course there are no sudden emergences of new tensions in the world that prompt renewed demand for the franc. Rabobank expects “EURCHF to trend up to the 1.18 area on a 6 mth view and to test the 1.20 area towards the end of next year.”
The Dutch firm may or may not be right but perhaps one thing in favour of arguments for a softer Swissy is that Switzerland’s central bank (SNB) remains seemingly supportive of such a downward adjustment in the franc’s value given Switzerland’s macro-economic situation. In Rabobank’s view “the sluggishness of [Swiss] consumption growth combined with continued slack inflation provide the SNB with good reason to lag the efforts of the ECB to normalise monetary policy settings going forward.” Traders will have their own opinions but the Rabobank feels “the SNB is likely to maintain its negative interest rate and its threat of using FX intervention to undermine the value of the CHF.”
Written by Neal Kimberley, External Currency Analyst.