Great Graphic: Euro Rallies against Swiss franc; Highest since January

The euro has rallied to its best level against the Swiss franc since the SNB surprised investors by abandoning its franc cap in the middle of January.  Since the end of June, the euro has rallied 5.15% against the franc, including today's roughly 0.4% advance.  Since the end of July, the euro is up nearly 3%. 

There are two main factors at work.  First, the easing of the existential crisis in Europe following the capitulation of Greece's  Syriza government to nearly all of the creditors demands after balking since the election in late January.  The Swiss franc was a haven.  If the Greek crisis led to the disintegration of the EMU, as some pundits had warned, the Swiss franc offered an alternative. 

The second factor is suspicion that the SNB has been intervening to weaken the franc, in light of the record loss (~CHF50 bln) in reserves reported in for H1, which was a function of valuation changes.  Many suspect, for example, that the SNB may be the bid supporting the euro from going through the $1.08 level. 

Before the weekend, Swiss officials reported that foreign currency reserves rose from CHF516.2 bln to CHF531.8 bln.  While intervention is possible, we suspect it was minimal at best.  We note that sight deposits were barely up in July.  They rose from CHF457 bln at the end of June to CHF462 blnat the end of July.  Indeed, they have remains at CHF462 bln since the middle of the July. 

We suspect valuation largely accounts for the increase in the franc valuation of reserves.  The dollar is about a third of Swiss reserves, and it rose nearly 3.2% against the franc in the month of July.  The euro is about 42% of the SNB's reserves.  It rose about 1.6% of against the Swiss franc.  The franc value of reserves rose 3%.  Sterling is seven percent of the SNB's reserves.  It rose about 3.4% against the franc.  The yen, which accounts for 8% of the SNB's reserves rose 2.8% against the franc in July.  SNB's reserves increased by 3% in franc terms. 

As this Great Graphic, composed on Bloomberg shows, the franc has quite a distance to go to get back to where the cap on the franc.   It is unlikely to return to status quo ante.   The ECB is engaged in an asset purchase scheme, and now that the Germans (and others) are open to the possibility that monetary union is not irrevocable, the existential risk does not return to where it was previously either.  Indeed, it seems that the risks of renewed tension in EMU will increase in Q4.  

The IMF has already made it clear that there is more work to be done in Spain and Portugal.  Both hold elections later this year.  In Portugal, the opposition Socialists are slightly ahead in the polls and are campaigning to resist further austerity.  In Spain, the opposition Socialists are stealing some of Podemos thunder in pushing back against additional austerity.  

The recent weakness of the Swiss franc has not been sufficient to push it off the top of the OECD's measure of the most over-valued major currencies.  It is estimated to be 28.2% over-valued.  This sounds rich, but outside of December 2014, when the over-valuation was about 27.5%, this is the closed to fair-value (according to the OECD) since 2010. 

There were rumors earlier this year that the SNB wanted the euro to trade between CHF1.05 and CHF1.10.  We were duly skeptical.  Before the current run, the euro's high since mid-January was about CHF1.08 set in February.  It made several lows below CHF1.03.    The CHF1.10, however, is a reasonable near-term target. Some of the franc selling seems technically motivated, and we note that the speculators in the IMM futures switched from a net long franc position to a net short position in the week ending August 4 for the first time since late-March. 

The dollar has risen from near CHF0.9160 in late June to a high near CHF0.9900 today.  This corresponds to a downtrend line drawn off the January and March highs.   It is bumping against the upper Bollinger Band (~CHF0.9870).  The upside momentum appears to be easing.  Initial support is seen near CHF0.9760 and then CHF0.9650. 

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