Goldman Sachs – Euro to Strengthen Against the Swiss Franc

The Swiss franc has regained the lost ground against the greenback, the euro and the pound in the first-quarter, even though Goldman Sachs and UBS has opined that it has created a notable investment opportunity in the EUR/CHF exchange pair.

The safe-haven franc of Switzerland stood as the second worst performing developed economy currency for this year even though at a considerably lower margin than it was only some weeks before, with the rebound happening as and after the euro hit its nadir in early April following a cumbersome first-quarter.

The Euro-Dollar exchange rate has subsequently rebounded from the lows recorded in April, and rest of the major currencies in the region have gained in tandem with optimism over the Eurozone economy, which may reason why Switzerland’s Franc has also strengthened, even though it has perplexed analysts. “Versus this background, the Swiss Franc – Europe’s safe-haven currency – has really been trading firmer against both the Dollar and the Euro,” states Michael Cahill, a Goldman Sachs G10 FX analyst.

“CHF devaluation in Q1 was likely exacerbated by investors adopting it as a financing currency during the real rate selloff, in our opinion. In that scenario, it’s natural to see the CHF selloff recovering as rates backtrack, but we believe this recovery is counter to fundamental factors,” Cahill says.

Cahill and the Goldman Sachs team recommended this week that investors sell the Franc and purchase the Euro instead, noting an inconsistency between the Euro’s safe-haven qualities and recent events in the Eurozone’s neighbor, where vaccines and accessible supplies are rapidly expanding.

The better-than-anticipated pace of vaccination has enabled the economy to reopen before what is broadly regarded as a summer of rebound. Moritz Diller, an analyst at UBS opined that the EUR/CHF is expected to rally up to 1.14, with the franc once again be utilized as a “funding currency” so that investors will have yields or impressive price return. Diller further stated that the Swiss franc stays extremely strong in spite of relatively better developments and increasing capital into Europe. Basically, the franc should turn weaker.

Diller further states that the most important factor is local population who are extremely unwilling to shift funds overseas. The SNB’s jolt of stop supporting 1.20 floor price in 2014 continues to considerably boost holdings of domestic assets. The country’s legal tender was mostly under pressure in the first-quarter, in addition to the Euro, while the greenback, the pound and commodity currencies such as the Canadian dollar gained strength.

All of this was facilitated by a combination of rapid success in vaccination people against the coronavirus, increased commodity prices, and change in rhetoric and also policy views by the central banks involved. However, the potential landscape has evolved in recent months, with European countries and economies narrowing the gap on vaccines and economic prospects, while Sterling, the Canadian Loonie, and the US Dollar all lost steam.

And although this is widely seen as supportive of the Euro; neither Goldman Sachs nor UBS are convinced that it should be in any way helpful to the Swiss Franc. “To entice outflows, confidence in the global (and particularly European) outlook likely needs to broaden further. We think this may be imminent as Europe’s fiscal and reopening led growth acceleration becomes more obvious, expectations about ECB tapering rise and the dollar’s downward momentum resumes,” UBS’ Diller says.

“As the foregoing factors are priced in, we expect leveraged positions to push EURCHF around 1.13-14,” Diller says.

Analysts refer to the Swiss Franc as a “funding currency” as it has the lowest cash rate worldwide, allowing it to be borrowed inexpensively and then resold to finance theoretically more lucrative bets on currencies that at least appear to offer greater returns.

In the meantime, the Swiss National Bank’s (SNB) strategy of utilizing Forex market interventions to safeguard or on the contrary assist in achieving its inflation objective has turned Swiss exchange rates an unattractive counter for several traders.

The central bank policymakers have not succeeded in attaining vaguely determined inflation and economic goals for many years and partly due to the franc that continues to be extremely overvalued by the market and limits the SNB from attaining its objectives by offering nearly non-stop benefits of Swiss imports.

Goldman Sachs’ Cahill suggest investors to capitalize on the likely rally by taking long position in the EUR/CHF counter with a target price of 1.14.