EURCHF breaks below parity. A further drop expected

7 jul 2022

The last time this pair dropped below parity, investors chose the CHF over the Euro. However, the SNB was worried about the deflationary aspects of such a move and acted to reverse the move.

This time, the fundamentals are more or less the same or different depending on how you interpret it.

The Euro zone investors are worried about the block tipping into a recession due to high energy costs. In Germany, for example, regulators have warned that entire industries could come to a halt should Russia fail to reopen the Nordstream 1 pipeline gas flows. The Yamal pipeline has also seen huge drops in gas supplies.

With this in mind for Euro fundamentals, the question remains whether the SNB is going to do anything. A stronger CHF is definitely going to the reduce inflationary pressures for Switzerland.

In my opinion, I expect the pair to head lower toward the Jan '15 bottom.

Risks to trade

• Historically, strong moves in one direction tend to reverse with similar momentum.
  
  
• The EURO - SWISS bond yield spreads show that the downward move may not be sustainable since FX tends to move in lockstep to spreads
  
• The SNB raised rates by a whooping 50bps for the first time in a long time. In typical fashion, Swiss bond yields jumped, some out of negative territory. However, the yields have retraced most of their earlier moves. This may imply that the markets are pricing that the SNB will not raise rates as much in the face of a recession in Europe.
  
  
  This might reduce the strength of the CHF with weakness showing up in the USDCHF.
  
  PS: I already have an open position ( This is not trading advice)
  
  

With that in consideration, I'll be short the Euro for Q3.