On a 1-3m horizon, our target for this pair is still higher though we have adjusted our Q4 forecast (at 1.10). The latest quarterly SNB meeting did nothing to fundamentally change the outlook. The inflation forecast was revised lower again in the near-term (on lower energy prices) though the long-term forecast was little changed.
Seasonally adjusted unemployment rose slightly in Q3 and the SNB calls the situation challenging for many companies. In view of the lower margins, these companies are under pressure to raise efficiency and reduce costs. The IMF notes that short-time work arrangements cushion the effect of slowing growth on unemployment (it is expected to increase but only modestly). But the combination of previous CHF appreciation, lower commodity prices and slack in the economy all conspire to keep inflation soft and CHF slowly trending lower.
We believe the driving factor behind our long-term CHF view is Switzerland's inflation outlook which will allow the SNB to keep its nominal rates lowest in the world. It has reported its CPI MoM numbers at 0.1% from previous -0.2%.
Although EUR/CHF reached a new post-floor high in the beginning September (at 1.1049), the pace of appreciation is painfully slow, Infact the fluctuation has been softened. But we do not expect that to change. We have positioned for higher EUR/CHF in options with a risk reversal but the long tenor (1y at entry, expiring July 2016) shows how long we expect this process to take.
Technically there is a reasonably well-defined rising trendline for EUR/CHF, dating back to the start of the current move higher in July. Support comes in at 1.0880 - that also coincides with the 40 dma. A break through there may set us up for a short-term retracement. We would view that as a buying opportunity for EUR/CHF.
