EURCHF: Start your engines

Being too far ahead of your time is indistinguishable from being right. This is much the way I feel about my EURCHF call from earlier this year. See Trade Idea: Buy EURCHF on SNB interventions, August 2020. 

If anyone followed me on this, I am extremely sorry. First of all, I was wrong - we haven't seen major SNB interventions. Secondly, it's been 6 months. Ouch. I still hold the same position I recommend then, and finally EURCHF is starting to turn around. 

This time, I continue to be long EURCHF and will recommend further adding to this position now. It's almost as if this is the moment we've been waiting for, and EURCHF is about to explode off the line in a screaming shower of tyre smoke. Sure, there are a few geopolitical tensions lingering around in the background, but are these truly likely to derail the global rates story? Not really in my opinion. To extend the racing analogy further, the Russia Ukraine story is almost like when two drivers at the back of the pack have a first corner crash, it slows the race down for a while, but then things soon get back on track. 

(Perhaps this understates the threat of a Russian invasion of Ukraine, but have a look what happened when we had Crimea). 

In Feb/Mar 2014, the CHF gained a little versus the EUR (note this chart is EURCHF), but it was hardly a monumental move!

What's driving EURCHF?

Well, at first glance it looks like yields: 

We can see that historically, there has been a clear link between EURCHF and German - CHF 2y yields. Generally, higher yield differentials lead to higher EURCHF and vice-versa. What's interesting to me though is that the last time yield differentials were this high, EURCHF was closer to 1.20. 

To me, this implies that there could be a lot further to go - I know that I'm not accounting for real rates here etc, but the magnitude of the move higher in yields relative to the move in EURCHF is surprising to me. 

Source: Reuters 

With the ECB also trying to maintain a semblance of credibility in the face of rising inflation, we even have some members talking of hikes in 2022, this can only be further beneficial for the EUR story too. While I do not personally buy into it, the first mutterings of hawkishness are likely to continue in future ECB meetings, so I continue to be bullish EURCHF. 

You might argue, doesn't the SNB need to become more hawkish too? Clearly the answer here is no! The Franc, for one, has appreciated dramatically over the last year or so which has helped keep inflation contained. The SNB's target is certainly still not being dramatically exceeded as the chart below shows. 

It seems likely then that SNB rates will remain in deeply negative territory, while markets will continue to price hawkishness for the ECB. This could lead to an absolutely fantastic carry trade for some market participants by utilising swaps markets etc. 

What's The Trade? 

I'm long EURCHF here at 1.0560, and I'm targeting 1.09 with a SL at 1.03. I think this is a fair balance of risk and a trade which could play nicely over the next couple of months. Decent upside available and can be done all the while picking up some decent carry.