SNB ready to act:
The SNB has given enough reason to believe that it will fight the CHF strength. The bank hasn’t changed its tone lately. Its latest message is that the CHF is “significantly overvalued”, which we agree with. The inflation forecasts were adjusted lower at the recent meeting (17 March), from -0.5% in 2016 to -0.8%, levels critical enough not to act.
The bank will intervene in the FX market as needed (probably big time if EUR/CHF falls below 1.0750). This time intervention is easier, as housing market momentum has been falling, suggesting extra money supply won’t be a problem at this point. Note, also, the SNB has been rather passive over the past few quarters, so they would not see a big trouble to scale up for a change, if needed.
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Towards fair value:
The long-term PPP models suggest that EUR/CHF is undervalued by over 20%, so there is plenty of room for upside. It thus remains the best funding currency for example for Emerging Market FX long positions. For the short term, a move above 1.12 in EUR/CHF should be aimed for – this is our 3M forecast.
