The reversal in fortune for the Swiss Franc has been one of the more interesting market stories this year. Following initial weakness as the US Dollar soared higher over Q1 & Q2, the Swiss Franc has since rebounded almost 7% against the Dollar. Against the Euro, the Franc has climbed almost 10%.
As we begin to move into the second-half of the year, traders are wondering whether the strength in CHF is likely to continue, or if a reversal is on the cards? With that in mind, it’s important to take a look at the factors which have been driving CHF this year and whether they are likely to continue to support the currency or if a change is likely.
Factors driving CHF so far this year
- Changing SNB narrative
- Shifting risk flows
Changing SNB Narrative
The main factor driving the current rally in CHF has been the shift in SNB narrative we’ve seen this year. Over the early part of the year, the SNB reaffirmed its commitment to maintaining an easing presence in the markets, despite soaring global inflation and many other central banks embarking on a tightening path. This message saw huge capital outflows from CHF as rising rate projections in other economies attracted demand away from CHF.
However, as we moved through Q2, the SNB began to shift its view, raising its inflation forecasts over the year and warning of the need to intervene to help quell rising prices. Then, in a major twist, the SNB announced a surprise rate hike in June, lifting rates from -0.75%, the lowest in the world, to -0.25%. This move front-ran the anticipated ECB hike in July and fuelled a major rally in CHF across the board, most notably against those currencies which had previously been supressing CHF.
Shifting Risk Flows
With the SNB hiking rates and signalling further hikes to come, along with removing its usual language around excessive franc strengthening, CHF saw a fresh influx of safe-haven demand. Prior to the move by the SNB, JPY had been the safe-haven of choice, along with USD. However, the fresh surge of demand on the back of the rate-hike saw capital rotating out of other safe haven areas, including gold, and into the Swissy.
Upside Risks for CHF
Looking ahead, there is good reason to anticipate further CHF strengthening. The shift in narrative at the SNB represents a major change in the global financial system, given the SNB’s prior status of having the lowest rates globally. As the SNB continues to lift rates, particularly if/when rates turn neutral/positive, this will draw further capital inflow to CHF.
Potential “Fed Pivot”
Alongside this, there is now a growing conversation around the Fed potentially slowing down on rates. With economic activity having remained in negative territory in Q2 and with recent CPI data showing that inflation slowed last month, many players are now repricing their Fed rate projection over the remainder of the year. If the Fed does slow down on rates and the focus on the recession grows in prominence, this will no doubt act as a downward catalyst for USD, bolstering demand for CHF.
Risk Backdrop to Remain Supportive
Furthermore, the risk backdrop which has been supporting CHF looks set to continue to add support. While global stocks are currently rallying the re-pricing of Fed rate hike expectations, if focus begins to land more on the risks of a global recession, this is likely to see stocks begin to slide, driving greater safe-haven demand towards CHF.
With the Russia-Ukraine war showing no signs of ending near-term, and with the negative impacts of the war growing as time goes on (energy prices rising, supply issues driving inflation), risk appetite remains highly vulnerable to further downside shocks. With this in mind, CHF look likely to continue to rally against EUR which is bearing the brunt of the war due to the eurozone’s specific economic exposure to Russia and Ukraine.
Let’s take a look at the technical layout for both USDCHF and EURCHF.
USDCHF – Weekly chart
The break below the .9540 level was a significant technical development. However, the breakdown was immediately rebuffed by demand at the .9375 level. With price still above the bullish trend line from 2021 lows, traders need to monitor the current resistance. A break back above here will turn focus to the .9640 level next. To the downside, a break of the support and trend line will open the way for a move down to .9100
EURCHF – Weekly chart
The bearish channel in EURCHF has seen the market breaking down below several key support levels. With price now trading below the last support at the .9780 level and below the bear channel low, the outlook remains heavily bearish. Bulls will need to see a break of the 1.0100 level to affect a shift in sentiment for the pair.