According to the firm's Australia/NZ head of rates & FX strategy, Sally Auld
Auld is arguing that the pair may test 1.12 by year-end as the SNB faces greater internvetion constraints given the sheer size of its balance sheet. She notes that the central bank will not be best placed to counteract the bullish impact on the franc from a broader squeeze on FX-funding as a result.
She also mentions that there is a potential for short-covering demand to amplify the swissie's appreciation should EM stress intensify while adding that the franc is not especially strong in real terms, so the SNB may less inclined to intervene in such a case.
The arguments above are very much solid in my view and there's good reason to believe that the swissie will still strengthen further against the euro. Looking at the chart, price is moving back below the 50.0 retracement level @ 1.1319 and is heading back towards a test of the support level from August last year @ 1.1261.
The support level there is what helped to stall the earlier decline this month but with emerging markets and trade disputes making headlines again, it's helping to aid flows into the swissie and away from European markets. In addition to that, the situation in Italy isn't helping with the case for a higher EUR/CHF.
However, the major caveat in all of this remains SNB intervention. To say that the swissie isn't strong in real terms is a bit misleading. On a trade-weighted basis, the swissie has strengthened to its highest level in more than a year after rallying since mid-July.
To put into context, the swissie is the best performing major currency in July and August trading so far up by more than 2%.
There's no doubt that the SNB's intervention capabilities are a little crippled by the ballooning balance sheet. But at the same time, it is tough to also see them let the currency slip away after the central bank has done so much to lift EUR/CHF back up to 1.20 back in April.
The further price moves away from 1.20, the more attractive dip-buying looks in my view. But for now with so much geopolitical and political issues plaguing risk sentiment, the tail risk for an upside move is larger than it would be for the downside and that is something not worth the trade for the time being if you ask me.
