EURCHF draws attention to SNB’s dilemma

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The EURCHF has been the sole forex pair that has well respected the Swiss National Bank’s floor at 1.20. With the pair trading near the 1.201 handle, many traders will be keenly watching this level and the SNB’s peg of 1.20 for any intervention by the Central Bank. To make matters a bit more complicated, the Swiss referendum, ‘Save our Gold’, an initiative led by the Swiss People’s Party (SVP) seeks to ban the SNB from selling its Gold reserves while making it obligatory for the central bank to hold at least 20% of its assets in Gold, besides repatriating all of its current Gold holdings back to Switzerland. The referendum goes to vote on 30th November.

From a Central Bank view, the SNB has repeatedly noted that such a move would hurt its capability to reign in on the Swiss Franc and to maintain a stable monetary policy and also puts to question, the SNB’s peg of 1.20 on the EURCHF. Opinion poll is currently divided on both sides as the deadline approaches while the currency trades dangerously close to the SNB’s peg.

From a technical perspective, the EURCHF weekly charts show a continuation of the bearish trend in EURCHF, especially forming a bearish flag, right near a well known support level of 1.20425. A retest back towards 1.2045 and possibly to 1.206 handle could see EURCHF retrace its losses and resume its move lower, as long at the swing high at 1.213 remains untested. The bearish continuation pattern gives a downside target towards 1.195 levels, well below the SNB’s floor. While on one hand it might seem impossible to think of EURCHF declining towards 1.195, if taken in context of the ‘Save our Gold’ initiative, the price objective seems well likely to be achieved and would be a bit clearer as we head closer to the D-Day.

EURCHF

The Swiss National bank has been active in expanding its foreign exchange reserve holdings and is well capable of defending the peg against the Euro. However, such moves by Central Banks often tend to drain the coffers quite significantly, especially if the physical intervention does not yield quick results. While the SNB does have credibility and the market is well aware of not to go against the Swiss National Bank, a change in the landscape in terms of the Swiss Gold referendum could tilt the scales quite dramatically.

While there are no major Central Bank events especially from the Eurozone in the run up to the Gold initiative, the possible direction in EURCHF is likely to be driven by the fundamentals, at least as far as the Euro is concerned. There has been a bit a of a relief as latest data suggest the Eurozone’s GDP has been softly ticking higher in what seems like a slow recovering rather than a full fledged recession. Inflation, although mixed remains resilient in the region despite the downward pressure on falling Crude Oil prices. Taken in context, the Euro is likely to remain well supported for as far as the Gold initiative is concerned. While general consensus calls for the EURCHF to bounce off 1.20 handle, the charts do point out to the risk of EURCHF declining towards 1.195 levels.

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