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EUR/CHF – Position for a Bottom
EUR/CHF dropped to its lowest level in 1.5 years today as the conflict between Russia and Ukraine takes a greater toll on the currency pair. Economically, the Eurozone has been directly affected by international sanctions on Russia, which triggered a retrenchment in demand for European assets. The Swiss Franc on the other hand has been a big beneficiary of safe haven flows. On top of that, inflation in the Eurozone is falling, triggering concerns from the European Central Bank. Since the beginning of August, there has been growing speculation that the ECB may increase stimulus further with possible action early next week. However we believe that this is unlikely because parts of the program they introduced in June have not been implemented yet and furthermore, the Swiss National Bank has pledged to keep EUR/CHF above 1.20. For this reason, we expect the currency pair to find a bottom soon as the risk of intervention increases with every 10-pip decline in EUR/CHF. Even if the SNB starts with verbal intervention, it could be enough to reverse the decline in the currency pair. So positioning for a bottom in EUR/CHF near current levels with a stop below 1.20 may not be a bad idea.
Technically, EUR/CHF is clearly in a downtrend with the break of 1.21 opening the door to a move down to 1.20 but technicals matter little when the central bank commits to a floor. On the upside, if EUR/CHF rises back above 1.2120, the downtrend would be negated.