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#1 08-12-2020 10:07:59

johnedward
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From: Paris - France
Registered: 21-12-2009
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EUR/USD: is the EUR/CHF foreboding a decline of the pair?

EUR/USD: is the EUR/CHF foreboding a decline of the pair?


One of the major themes for the financial markets this year has been the fall of the USD. The decline of the dollar has helped central banks fight liquidity problems as the world needed dollars at the beginning of the virus situation.

However, another dominant theme is the rise of the euro. Not only did the EUR/USD strengthen during the virus period, but all euro pairs did - with one exception, the EUR/CHF.

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EUR/CHF, ECB and SNB

The EUR/CHF is one of the most interesting and difficult currency pairs to trade. It reflects the exchange rate between the currencies of two closely related economies. However, this proximity does not mean that the two central banks have similar views on monetary policy.

On the one hand, the European Central Bank (ECB) sets several interest rates and holds one in negative territory - the deposit facility rate. Although it has been doing so for several years, it has been forced to maintain an easy position due to the weak economic situation.

On the other hand, the Swiss National Bank (SNB) has the lowest interest rate in the world. Set at minus -75 basis points, the SNB rate is mainly used to frighten off Swiss franc investors. The SNB has made no secret of the fact that it constantly intervenes on the foreign exchange markets to weaken the CHF, but success is not guaranteed.

Looking back, the SNB was forced to lower the floor to 1.20 in 2015 due to the ECB's relaxation. The SNB suffered one of the biggest losses in its history, and no one was able to prevent the franc from appreciating.

In the years that followed, the EUR/CHF recovered the lost ground, but fell to 1.06 this year. While the euro has appreciated in all areas, and for good reason, the EUR/CHF's inability to keep up could be a disruptive factor for the EUR/USD rally. In other words, if the euro reflects the strength of the European economy, the EUR/CHF exchange rate will follow. This is not the case, suggesting that the EUR/USD rally is just an anomaly, the result of different monetary policy decisions taken by the two central banks.

The EUR/USD traded as high as 1.2175 last week. In addition, the EUR/GBP or EUR/JPY followed suit, reflecting the strength of the euro.

However, the EUR/USD bears have an unexpected ally in the EUR/CHF exchange rate. As long as it remains close to current levels, it suggests a possible turnaround for the euro.

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