Swiss Franc and Eurozone Update

The EUR/CHF currency pair is trading at around 0.9287, holding a near two-week high as the Swiss Franc weakens due to lower demand for safe-haven assets. Recent inflation data from the Eurozone shows progress towards the ECB’s 2% target. In October, core inflation rose by 0.3%, staying steady at 2.4% annually, slightly above expectations. Headline inflation went up by 0.2% month-on-month in October, meeting forecasts with an annual rate of 2.1%, down from 2.2% in September. The ECB kept key interest rates unchanged, mentioning that inflation is near their medium-term target and did not change their inflation outlook. Data from Switzerland showed Real Retail Sales increased by 1.5% year-on-year in September, beating the 0.3% forecast and recovering from a dip in August. SNB member Petra Tschudin pointed out that the Franc’s effect on inflation is more crucial than its actual value. The SNB is ready to step in to influence the currency market and may reintroduce negative interest rates if necessary. The gap between the European Central Bank and the Swiss National Bank is becoming clearer. The ECB seems satisfied with its current “on-hold” policy as inflation nears the 2% target. This sharply contrasts with the SNB’s willingness to take actions to weaken the Franc through market intervention or negative rates. Given this situation, we recommend establishing long EUR/CHF positions using call options in the upcoming weeks. Options allow for potential upside while keeping risk limited to the premium paid. This approach is wise, as any unexpected comments from the SNB could lead to quick, though likely short-lived, drops in value.

Divided Economic Policies

The ECB’s position is supported by a drop in headline inflation to 2.1%, while Swiss inflation remains low at just 1.4%. This gives the SNB plenty of room to continue its expansive policy. Eurozone economic sentiment, although still negative, has shown slight improvements in recent surveys. The differences in inflation and policy are likely to drive the EUR/CHF pair. It’s important not to underestimate the SNB’s commitment, especially considering the market turmoil that followed their decision to remove the franc’s peg in 2015. However, their current actions are keeping the franc’s value down, which is exactly what they aim to achieve. With one-month implied volatility for EUR/CHF at a relatively low 4.5%, buying calls to position for a gradual increase looks appealing. Create your live VT Markets account and start trading now.

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