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Swiss Haven Sees the Franc ‘Grinding Toward Parity’ With Euro

Swiss Haven Sees the Franc ‘Grinding Toward Parity’ With Euro

(Bloomberg) --

The franc may hit parity with the euro for the first time since 2015, when the Swiss National Bank shocked markets by lifting its currency cap, according to Deutsche Bank AG.

The currency has been swept up in recent weeks with other havens as the coronavirus outbreak spreads fear through markets, taking it up 2% this year to about 1.06 per euro. The SNB may have stepped up interventions last month to stem the flow, yet Deutsche strategist Robin Winkler argues the “Swiss gorilla” of its nearly $800 billion in reserves may actually be a source of structural support for the currency.

“The balance sheet will only add to the Swiss franc’s ‘safe haven’ appeal in coming months,” Winkler said. “As central banks around the world use what policy space they have to deal with the virus shock, even an emergency rate cut from the SNB -- already priced -- may not prevent the euro-franc from grinding toward parity.”

Swiss Haven Sees the Franc ‘Grinding Toward Parity’ With Euro

The SNB declined to comment on Deutsche Bank’s view. Policy makers haven’t ramped up their rhetoric recently, continuing to call the currency “highly valued,” though reluctance to aggressively sell it may be partly driven by fear of being labeled a currency manipulator by the U.S.

The central bank lost much of its credibility to weaken the currency when the peg was abandoned five years ago, Winkler said. The franc surged as much as 41% versus the euro that day, and in the month prior the SNB had pledged “utmost determination” to defend its currency ceiling.

The currency was steady at 1.0657 per euro on Thursday, having touched the strongest since 2015 at the end of February. In the options market, traders have been increasingly setting up bullish wagers on the franc in anticipation of coordinated central bank policy action. Demand for Swiss franc calls, which grant the right to buy the currency versus the euro, has surged relative to options that allow the opposite.

Swiss sight deposits have increased for seven consecutive weeks, a sign that the SNB may be taking action to counter the strengthening franc. While Toronto-Dominion Bank doesn’t see the currency reaching parity with the euro, it does expect further gains.

“From our perspective, we think this is a pretty clear sign the SNB is already trying to lean increasingly hard against further franc appreciation,” said Ned Rumpeltin, head of European foreign-exchange strategy at Toronto-Dominion. “In the absence of that, we are left to wonder if we would be at parity already.”

Swiss Haven Sees the Franc ‘Grinding Toward Parity’ With Euro

--With assistance from Robert Fullem and Catherine Bosley.

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net;John Ainger in Brussels at jainger@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Neil Chatterjee, Pete Norman

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