USD/CHF, EUR/CHF: A SNB Schlegel surprise set to rattle Swiss franc

• Market split on 25 or 50bps SNB rate cut
• SNB Schlegel’s debut to set the tone for Swiss monetary policy
• USD/CHF tied to US-Swiss 2-year yield differentials
• EUR/CHF directional risks may be skewing higher

Overview

Thursday’s Swiss National Bank’s (SNB) interest rate decision will deliver fireworks one way or another, with a 25 or 50bps cut deemed a line-ball call by traders. Coupled with the release of US inflation figures on Wednesday and European Central Bank’s (ECB) policy decision soon after the SNB’s rate call, and the next 24 hours could deliver some extreme movement in USD/CHF and EUR/CHF.

This note will look at pricing for the December SNB meeting, key directional drivers of USD/CHF over the past month, along with the technical picture for both it and EUR/CHF, providing a potential blueprint for traders to build setups around.

Divided market recipe for volatility 

The SNB’s final rate call of 2024 looks set to deliver fireworks with the market divided on whether it will cut 25 or 50bps, as seen in the implied probability using overnight index swaps from Bloomberg below.

Source: Bloomberg 

Whenever you see a market as divided as this, it inevitably leads to volatility as traders react immediately to the decision, erasing the pricing for the alternate outcome within seconds, sometimes faster. There are two outcomes, but only one can be right.

Watch for rate differentials to reassert 

I don’t pretend to be an expert in Swiss monetary policy, especially when we’re dealing with a new SNB president in Martin Schlegel, but I can say with more confidence that we know what is likely to influence USD/CHF once volatility around the event dies down: interest rate differentials, especially at the front-end of the curve influenced by central bank expectations.

Source: TradingView

While not the strongest relationship, note the rolling correlation between USD/CHF and US-Swiss two-year bond yield differentials in blue in the right-hand pane above, sitting at 0.83 over the past month. That’s stronger than any other part of the interest rate curve and even stronger than the inverse relationship with EUR/USD over the same period.

Should that relationship be maintained, wherever USD/CHF ends up following the US inflation report and SNB decision, relative short-dated interest rate differentials between the US and Switzerland may provide clues on directional risks for USD/CHF moving forward.

USD/CHF momentum turning higher?

Source: TradingView

I’m not putting too much weight on it given major risks events ahead, but the reversal back above .8800 comes across as a bullish development for USD/CHF near-term. Though yet to be confirmed by MACD, the downtrend break in RSI (14) also hints that momentum risks may be starting to turn higher.

For those considering USD/CHF setups, resistance may be encountered at .8895, .8959, .9000 and .9050. On the downside, support is found at .8800, 50-day moving average, .8711 and .8617.

EUR/CHF signals turning bullish 

Source: TradingView

On the EUR/CHF outlook, the picture is more clouded from a market driver perspective with the pair not particularly correlated with any major asset classes I track, potentially increasing the weight of price and momentum signals when it comes to directional clues.

While the pair has been trending lower for quite some time, the divergence between price and RSI (14), the bullish signal from MACD and bullish engulfing candle on Tuesday points to building upside risks heading into Thursday.

For those evaluating setups, resistance may be encountered at .9334, 50-day moving average, .9446 and .9520. Downside support is located at .9256 and .9211. Below the latter, there's little to speak of until .8630 where EUR/CHF bottomed in the aftermath of the SNB peg being broken in 2015.

-- Written by David Scutt

Follow David on Twitter @scutty