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Currencies CHF Quick, Call the SNB! EUR/CHF Sf1.2000 Floor in Sight

Talking Points:

  • EURCHF nears Sf1.2000 floor, at lowest rate since Sept 2012.
  • EURUSD acting as inverse of USDCHF; EUR loses elsewhere.
  • Rolling 20-day correlation between EUR and CHF is +0.98.

The Euro-Zone financial crisis and its resulting toll on monetary policy weren’t limited to the European Central Bank: the Swiss National Bank has been an adjunct branch in recent years, forced to act as the ECB acts, ever since the SNB levied the Sf1.2000 floor on September 6, 2011. We may be on the verge of a paradigm shift, however.

On November 30, Swiss residents will vote on a referendum that could force the SNB to increase its foreign reserve allocation to gold, up to 20% from the 8% level it currently resides at. Considering that the SNB has been buying EURCHF left and right in order to keep the Sf1.2000 floor in check, traders have reached a natural conclusion: the SNB will be forced to sell foreign currency out of its reserves to reallocate to gold; and that means the SNB would likely be selling Euros.

Regardless of the speculation around the SNB referendum, attempting to stay long against the floor may be a tricky bet. We prefer to stay on the opposite side of the trade of the crowd; so the fact that the retail crowd is now long EURCHF by a ratio of over 50 longs per 1 short, we are adament about staying away from the long side here.

Curiously, a break of the Sf1.2000 floor in EURCHF might prove to be positive for EURUSD. First, EUR and CHF have traded to a +0.98 correlation over the past 20-days, implying that EURUSD and USDCHF are moving in near-lockstep, just inversed.

Second, recall what happened on September 6, 2011, when the floor was raised: USDCHF rallied and EURUSD fell, as traders were forced to diversify out of the CHF as a safe haven and take on more USD exposure. Should the referendum pass, an unwind of this relationship could occur (though, if EUR is being sold to purchase gold, the magnitude of support provided to EURUSD may be dampened).

 

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