Technically, being long EUR/CHF doesn’t make a lot of sense (given the lack of uptrend). But, then again, this is a special situation. In theory, what we’re seeing is the market pitted against the Swiss central bank. The question, then, is who will win.
We also need to be aware that below 1.2000 are billions of EURs of stops in the market. Some of these have been placed by funds that are long and hoping the 1.2000 floor holds. Others will be placing sell stops with the idea that the SNB lose its battle and the pair subsequently collapses.
My own personal view is that the floor will hold and will be working potential bids into the overnight low of 1.2050. Stops should be placed above the figure at 1.2004 (to avoid the potential stop-loss run) and you'll then need to be fairly nimble to take profits at 1.2150.
Questions around QE
The ECB meet next week and, while only one investment bank expects to see action from the ECB, my view is in line with the consensus – that they will leave policy unchanged and say more can be done. The argument that we will hear much more colour around future quantitative easing is understandable but premature, I feel.
The market believes we will see QE at some stage next year (after March). However, if you listen to the remarks from the German finance minister over the last 12 hours, it seems the barriers to QE are predictably high. We would clearly need to see a major collapse in manufacturing and strong deflationary pressure for full-scale asset purchases to materialise.
The other interesting issue is how the SNB will respond. They can still cut its own sight deposit rates to negative and, given the influence of the Swiss banking sector on the Swiss economy, a SNB rate cut to negative would have a very powerful impact on the CHF.
The idea behind negative deposits is to penalise banks for parking funds on the central bank’s balance sheet, thereby incentivising them to either lend (unlikely) or seek out opportunities offshore. This would create capital outflows, which would weaken the CHF.
Keep an eye on Eurozone CPI (first estimate) at 19:00 AEST. With the market expecting a slight pullback in inflation to 0.3%, there are risks it will undershoot. I am sceptical we’ll see a big miss to consensus. However, all eyes will be on this data point.