The strong euro is proving a difficult hurdle for U.S. dollar bulls, while the European Central Bank has expressed concern about the strength of the shared currency on exports. Yet there is another player really hoping for the euro to pick up more steam, analysts say: the Swiss National Bank.
The SNB’s latest monetary policy assessment is due on Thursday. In a quiet data week across the G-10 currencies, which include majors such as the U.S. dollar DXY, -0.08% euro EURUSD, +0.1339% and British pound GBPUSD, +0.2888% the SNB might just be the highlight, ING strategists Chris Turner and Viraj Patel wrote in a note on Monday.
Switzerland long found its currency—the franc EURCHF, +0.0262% —overvalued even before it lifted the government-mandated floor of 1.20 francs per euro in January 2015. It had been in effect for three years at that point. The floor was originally put in place to avoid the franc getting too strong during the height of the eurozone crisis, when the ECB began rolling out its asset-purchasing program. Removing the floor sent the currency soaring and the euro into a tailspin.
But since then, the euro has been riding wave of new-found strength against its rivals, and SNB chairman Thomas Jordan admitted in an interview with Swiss newspaper Finanz und Wirtschaft earlier this month that the recent rally has finally helped to take the edge off the franc’s perceived overvaluation. That said, he also stressed that the process wasn’t done yet.
Still, the geopolitical tensions around North Korea have the potential to send the franc soaring again, Jordan suggested, as it is a traditional haven for investors during turbulent times.
“The SNB still things the Swiss franc is overvalued,” the ING strategists said, “whether it drops the adverb ‘significantly’ [in its assessment] could be of interest.”
The bottom line is that the ECB’s quantitative-easing program damaged the euro-franc pair and the SNB now hope that the ECB’s future hawkish policies — that is, rolling back its €60 billion monthly buying plan — will resolve it, they wrote.
“We agree with their position and see scope for a big rally over the coming quarters,” ING’s researchers said. “[We] expect the SNB to fan the flames of divergence between itself and the ECB, allowing rate spreads to widen,” their note read.
Those comments suggest that highlighting the ECB’s likelihood of tapering against the SNB’s inaction would allow the franc to further weaken against the euro.
ING’s target range for the euro-franc pair for next week is 1.1360-1.1520 francs per euro, while the one-month target is 1.16 francs. The pair last changed hands at 1.1408 francs, compared with 1.137 late Friday.
Thursday’s SNB policy statement is expected to focus on subdued growth, low inflation and weak trade, all of which would be helped by a weaker franc.