EUR/CHF: carry trade opportunity as ECB and SNB diverge

By:
on Mar 21, 2024
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  • The EUR/CHF pair has risen in the past seven straight weeks.
  • The Swiss National Bank decided to slash interest rates on Thursday.
  • The European Central Bank has a few months to start cutting rates.

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The EUR/CHF exchange rate is on track to do something it has not done since 2015 as the SNB and ECB diverge. The pair is up for seven straight weeks and is hovering at its highest level since July 2023.

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ECB and SNB divergence

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The EUR to CHF exchange rate continued its bullish comeback this week after the Swiss National Bank (SNB) decision.

In a statement on Thursday, the bank caught many analysts off-guard by cutting interest rates by 25 basis points. It brought them from 1.75% in January to 1.50%, becoming the first major central bank to slash rates. 

The bank noted that the rate cut was necessary because of the current state of the economy. There are signs that the Swiss economy is slowing while inflation has moderated in the past few months. 

The bank also believes that the Swiss franc is highly valued against the US dollar and the euro. Its statement added that:

“Growth is likely to remain modest in the coming quarters. The weak demand from abroad and the appreciation of the Swiss franc in real terms over the past year are having a dampening effect. Overall, Switzerland’s GDP is likely to grow by around 1% this year.”

The EUR/CHF pair rose because the SNB’s actions contradicted those of the European Central Bank. 

In its decision this month, the ECB left interest rates unchanged and lamented that inflation was still significantly higher than its target. It did not provide guidance on when it will start cutting interest rates.

Economists expect that the ECB will start cutting interest rates in June this year since inflation is nearing its 2% target.

The SNB rate cut has increased the spread between rates in Switzerland and the European Union. This, in turn, has created a carry trade opportunity. This is a situation where people borrow in low-interest rates environment to invest in high-rate countries.

EUR/CHF technical analysis

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EUR/CHF

EUR/CHF chart by TradingView

The EUR/CHF exchange rate has rebounded sharply in the past few weeks as the ECB and SNB diverged. On the weekly chart, the pair has already crossed the important 50-week moving average.

At the same time, the histogram and the two lines of the MACD have moved above the neutral point. The Relative Strength Index (RSI) and the Stochastic Oscillator have all pointed upwards.

Therefore, the outlook for the pair is relatively bullish as buyers target the parity level of 1.00 after the SNB decision. This is in line with our recent EUR/CHF price forecast

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