am/FX: Swiss Miss

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Today I talk about why it’s not too late to get long EURCHF.

Long EURCHF here with a stop at 0.9714, targeting 0.9944.

by Brent Donnelly

August 31, 2022

Aug 29, 2001

Serena Williams wins at US Open;

Albert Pujols hits a HR and Vlad

Guerrero Sr, Craig Biggio & Dante

Bichette all record a hit.

Aug 29, 2022

Serena Williams wins at US Open;

Albert Pujols hits a HR and Vlad

Guerrero Jr, Cavan Biggio & Bo

Bichette all record a hit.

Current Views

Long EURCHF @ 0.9797

Stop 0.9714

Take profit 0.9944

August 31, 2022

Swiss Miss

EURCHF has been ripping the past few days as it’s one of the most crowded positions in FX and EUR sentiment has shifted from raging bearish to mildly constructive in the short term. This change in EUR sentiment is a function of a few things:

Energy prices peaked for now.
EU talking about intervening in power market. This could be a fiscal stimulus that requires higher rates.
0.99 and 1.00 strikes in EURUSD have killed the downside momentum.
ECB starting to look a tad more serious on inflation.
ECB meeting coming September 8 means there is event risk and the run up to ECB is more likely to be positioning for hawkish outcomes, not dovish ones.

A good strategy in strong trends is to trade pullbacks in the trend and so you might be tempted to sell some EURCHF here now that we are 250 points off the lows. I would not do that. Switzerland CPI comes out tonight (2:30 a.m. tonight) and the risk is that the number comes in low.

Germany and France have already released their CPI data for August and there is a strong correlation between inflation across the continent. Not only is the data correlated (as you would expect); the misses in the data are correlated. That is: if France and Germany CPI miss in the same direction vs. economists’ expectations, Swiss CPI probably will too.

I decided to isolate the post-COVID period for my analysis today because inflation was low and boring and easy to predict before that. This gives us a sample size issue, but I’m not super bothered by that because I have done analysis like this in the past using these countries and I have done this with Australia vs. New Zealand too and the intuitive outcome is the one that prevails. There is new information in the more timely economic release and you can use that information to predict the less timely one.

This first chart isolates months where both France and German CPI came in either low or high in a particular month. The bars show the Swiss CPI miss (i.e., actual minus expected). Blue bars are when you would have bet Swiss CPI will be high and gray are when you would have bet it would be low. This simple framework was correct eight out of nine times.

What does Swiss CPI do when France and Germany both miss?

Here’s all the data for all the months. You can see that the general vibes from France and German inflation send a message about what the Swiss Miss will look like.

Actual minus expected MoM inflation in France, Germany, and Switzerland

Another important factor here is that Swiss CPI is impacted heavily by currency movements. Large divergences between Swiss inflation and inflation in the rest of Europe from 2010 to 2020 were mostly explained by the huge moves in the currency (in both directions). Therefore, there’s even more reason to expect a miss in CPI as the CHF has been raging higher in recent months.

Is this CPI release a game changer for SNB policy? Most certainly not. But in a market where there is already a fire in the disco because of positioning, a weak Swiss CPI is likely to trigger another huge round of short covering in EURCHF. And the chart is mostly open air right to 0.9950. Any kind of trendline or channel you draw shows the down trend is busted.

EURCHF breaking out of a sustained down trend

As a short-term tactical trade, I like long EURCHF here (0.9797) with a stop at 0.9714, looking for 0.9944. Risking 83 to make 147. I acknowledge the location is a bit hard to stomach as we’re so far off the lows, but momentum is strong, and the data play makes sense to me. I think EURCHF continues to rage higher for a week or so.