Afternoon analysis 11.09.2015

, author:

Marcin Lipka

Recently the investor's attention have been focused on the Federal Reserve speculations concerning interest rate hikes. However during last week significant changes happened on the Swiss franc which lost two percent to the euro. The similar move was seen on the CHF/PLN. Is it possible that this trend can continue?

The Swiss franc overvalued

The Swiss National Bank (SNB) has tried many times to stress that the currency is overvalued. Thomas Jordan, the SNB chief, touched this topic even during the most recent Jackson Hole meeting even though the symposium was focused on inflation.

According to the materials presented by Jordan the franc is overvalued around 20% in the basket of trade weighted currencies also taking into account the inflation (REER). What is also worth to note the Swiss monetary policy makers (MPC) actions seem to be more organized than previously thought when the SNB depegged the EUR/CHF rate.

The MPC has processed many currency interventions to weaken the currency. It resulted that the franc didn't strengthen in times of fear and the safe haven flow was stopped when Greece issues occurred. The similar situation was observed during August turmoil after China devalued its currency in August.

Outflow of speculators?

It is possible that the orderly run SNB strategy which combines negative interest rates and presence on the FX market has started to payback. Last week nothing special happened on the market to explain almost two percent franc fall to the euro.

As a result it might mean that some speculators who had expected further CHF strength in the moment of market fear decided to withdraw from the currency and were defeated in the confrontation with the SNB. Some if this capital outflow brings weakness to the Swiss currency.

This move, of course, cannot not be continued week by week and the road to further weakness is expected to be bumpy. However, currently we may be at the beginning of the longer franc slide which should bring the Swiss currency valuation to more real value.

Franc again at 3.50

Movements on the franc pushed some market observers to publish new estimates on the EUR/CHF. Bloomberg cited today an opinion of the FX chief strategist from Royal Bank of Canada. Adam Cole claims that the franc is still extremely overvalued and should continue the fall. Cole also sees that the EUR/CHF should get to 1.20 level in a time frame of 18-24 months

If we translate this projections to our market we may see the franc at 3.50 level if the current EUR/PLN rate remains at 4.20. It would be a good message for people who have to payback the CHF denominated mortgages especially that with extremely loose monetary policy the interest part of the mortgage should remain at low level.

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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Sp. z o.o is prohibited.

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