Currencies appear ready to test Swiss National Bank pledge of keeping the floor under the EUR-CHF at 1.20 level. In spite of recent change at the helm, the central has not indicated major policy change concerning domestic currency, suggesting that its intention to prevent the CHF from appreciating is still valid. We should find out soon enough just how vigorous Swiss authorities are in defending this line in the send. At present, with the EUR-CHF at 1.2060, this test seems almost inevitable, perhaps within days.

While many in Switzerland support these meassures, some are warning about unintended consequences, saying that Franc limit against the Euro may cause the country’s economy to overheat if authorities are not vigilant to its effects. For example, property prices have increased in Switzerland, aided by near zero rates and demand from foreigners looking for employment. This could be mitigated to some degree by increasing the benchmark rate in order to prevent a property bubble. However, such move would put upward pressure on the Swiss Franc and jeopardize the 1.20 EUR-CHF limit introduced in September to fight deflation. Clearly, the SNB will have to walk a fine line.

The EUR-CHF is in a precarious position, having just left its prolonged trading range. At present, there is no real support on the daily chart, other than the psychological importance of the 1.20 level, backed up by the SNB’s threat. If the central bank does not act, or only delays its involvement, the price can easily slip to 1.16 in short order. While this is playing out, I will focus on short-term trading on Friday, mostly in the USD pairs at the start on the London session. They show good volatility and could offer decent opportunities.

Mike K.