Even as the euro has strengthened against the dollar over the last week and a half is unable to carry that advanced to its fight against the Swiss franc.
The EUR/CHF pair has been trading mainly sideways over the last two weeks but with a downward lean.
There pair tests important support at 1.2055-1.2060, which the past two weeks has created a level of demand. However as we head towards the end of the week we have another attempt to push towards that support and a break here would open up further downside risk including a run at the 1.20 floor for the pair.
This would create a big battle between the market and the Swiss national Bank as its this prepared to defend that floor via buying the EUR “in unlimited quantities.” As we continue to not see a resolution in the Greek debt negotiations, the CHF continues to be bid as a safe haven thereby reinforcing a fundamental bias for the Swiss franc against the euro in these conditions.
From FX-MM: “Even though, in theory, it could buy unlimited amounts of foreign exchange by printing Swiss francs, there are clearly limits in practice and also costs to the domestic economy from doing so.
The substantial increase in sight deposits at the SNB has boosted narrow money, currently rising over 200% in annual terms. The SNB will struggle to temper the effects of such increases in liquidity without causing market interest rates to move higher, which would work against its policy of keep the franc from appreciating.
To date, the Swiss regulators have been pushing on the SNB and lenders to keep a check on mortgage lending, given that mortgage costs are so low. A further wall of liquidity from the SNB would further exacerbate this dilemma, leaving the SNB with the option of either mopping it up (sterilising) and pushing up rates or having to take more measures to counteract the risks of credit expansion in the domestic economy.”
Still we expect the SNB to defend this level and the market if it tries to “break the bank” will likely be unsuccessful. Therefore the break of the 1.2060 lows could create the trigger for SNB action.
Nick Nasad is the Chief Market Analyst at IBTrade and FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
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