ECB actions means CHF likely to remain good carry trade candidate
The determination of the European Central Bank to rekindle some inflation and growth in the Eurozone and to weaken the Euro presented an opportunity for the Swiss to reaffirm their cap on EUR/CHF making their currency a good ongoing carry trade candidate
The Swiss National Bank said it will maintain the EUR/CHF cap at 1.20 into 2016 – a commitment it first made nearly 3 years ago when the currency was soaring as a safe haven.
For carry traders this commitment is useful as it dispels some speculation that the SNB was considering relinquishing the peg sometime in 2015
The benefit of using CHF for carry trades are its very low rates of interest. This is ideal for funding purchases of higher yielding currencies such as NZD. However, unlike with the EUR, CHF comes with a solid commitment by the central bank to do whatever takes to stop the currency from appreciating too much.
EUR/CHF – both committed to not appreciating
Low inflationary environment
Indeed, Switzerland has good reason for its commitment. Inflation there is almost non-existent. Meanwhile, GDP growth is expected to expand at a steady 2% this year. And given Switzerland is so dependent on exports the SNB is likely to be watching that CHF doesn't appreciate too much against other currencies such as USD. But given CHF is effectively pegged to the EUR that to a large extent depends on the direction of that currency.
At the moment the EUR/CHF is trading around 1.2150, slightly above the SNB's peg and back in May 2013 it did briefly hit 1.2650, but more recently it has retreated from overhead resistance at 1.2238.
However, the ECB's goal of refiring the Eurozone economy could put the SNB to the test. If for instance the ECB decides it needs to get exceptionally aggressive with its monetary policy the pressure on the SNB's peg will be intense.
On the hand the ECB's decision making process tends to be slow and relatively constrained.
So although the SNB's commitment is useful to carry traders, and is probably stronger than the ECB's desire for a weak currency, using CHF isn't without risks. It's also worth remembering that the benign environments in which carry trades tend to flourish often end in costly violent bouts of volatility. And right now there are plenty of catalysts for volatility lurking in the global economy.
By Justin Pugsley, Markets Analyst MahiFX
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