The Swiss franc fell another 1% against the euro on Friday morning in a continuation of the week-long selloff after comments from the Swiss National Bank chief, Thomas Jordan. The comments, which came on Monday in an interview with Le Temps, centered around Jordan’s belief that the Swiss franc was “significantly overvalued.” This exacerbated an already weakening Swiss franc which finally broke through the key 1.10 level. As this level was breached, increased hedge fund technical selling drove the euro to heights not seen since January 2015 against the franc. The franc is currently trading at its lowest level against the euro since the SNB removed the peg in early 2015 causing an immediate 15%+ dislocation.
As the European Central Bank gets ready to announce a tapering of its asset-purchasing program, the SNB seems comfortable with continued currency weakness. The two central banks are diametrically opposed to one another in the near term. Now that the SNB has endorsed the concept of a lower valuation for the franc, continued weakness can be expected against the major crosses, especially the EUR, GBP, and USD. If the Eurozone continues to report solid data, the EURCHF cross may break through the 1.15 level, after which it faces little resistance back to the levels it experienced when it was pegged to the euro. There exists a real possibility of the cross reaching the 1.20 level by year-end.
Expect additional weakness against the dollar and pound as the Fed and BOE are both likely to hike rates once in the time remaining before year-end. The terms of the asset-reduction plan, which will most likely be announced in August or September, may also drive the dollar higher against the CHF. Overall, the best opportunity looks to be riding the SNB policy for a lower CHF against the EUR in the coming months as it approaches the 1.20 level. Low funding costs and many potential central bank policy catalysts exist to keep the current trend on track.