EUR/CHF briefly dips under 1.0500, hits lowest since July 2015, in test of SNB resolve

• EUR/CHF briefly dipped below 1.0500 for the first time since July 2015, testing the SNB’s resolve for CHF strength.
• The bank has defended the 1.05 level in the past.

EUR/CHG hit its lowest level since July 2015 on Thursday, surpassing the May 2020 low at 1.0535 to print a session low at 1.04978. That low was printed during the European morning and since the start of the US session, the pair has rallied back to the 1.0520s, where it currently trades with on-the-day gains of about 0.2%. There has been a lot of focus on rising Covid-19 infection rates in Europe and the associated reimposition of lockdown restrictions, a theme that has undoubtedly contributed to safe-haven CHF outperformance versus the euro.

The 1.05 level is seen as an important line in the sand for the SNB. The bank vigorously defended the level last April and May, with currency intervention a key tool employed by the SNB to figh deflation in Switzerland. By selling Swiss francs, the bank can weaken CHF (or at least prevent it from appreciating), thus preventing Swiss imports from becoming ever cheaper and pushing consumer prices lower.

Inflation differentials in 2021 have favoured the Swiss franc over the euro. According to the October Consumer Price Inflation report from the Swiss Federal Statistical Office, the YoY rate of CPI in Switzerland was 1.2%. That compares to a YoY CPI rate in the Eurozone of 4.1%. In other words, the purchasing power of each euro has dropped 2.9% more than the purchasing power of each Swiss franc over the last twelve months.

Eurozone inflation is set to remain elevated compared to Swiss in 2022. A 12 November Reuters poll showed that the median economist forecast was for Eurozone inflation to average 2.2% in 2022. That compares to the SNB’s forecast for 2022 inflation of 0.7%. This continued divergence in the purchasing power of the two currencies is one reason why EUR/CHF may well continue to broadly head lower over the medium term.

Some analysts are of the view that the SNB might be willing to let the pair fall sustainably below 1.05. According to Capital Economics, the “persistent weakness of Swiss inflation, and the resulting trend appreciation in the nominal exchange rate, presents the SNB with a moving target when assessing when it will intervene during bouts of upward pressure on the franc... Having defended the CHF 1.05 per euro mark in earnest last year, we suspect that the SNB’s “line in the sand” may now be closer to CHF 1.025, and that it could live with the franc rising to parity with the euro over the coming years.”