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- Goldman Sachs believes that markets are somewhat underestimating the significance of the inflation differential for the Swiss Franc (CHF), suggesting the selling of 25 Delta 3-month EUR/CHF calls. The recent strength of the Euro (EUR) offers an attractive entry point, and signs of more persistent inflation should mean that the ‘fair value’ of EUR/CHF continues to trend lower, serving as a strong anchor for CHF.
Unlike most G10 central banks, the Swiss National Bank (SNB) does not target a 2% inflation rate but aims for inflation close to 0%. This is one reason why the CHF tends to perform well when global inflation is high. Given the substantial inflation differential between Switzerland and its major trading partners, the nominal exchange rate needs to continue trending stronger over time to keep up.
The bank expects that in the SNB’s next meeting, it will once again make it clear that it will guard against FX depreciation. They also see some chance of a 50 basis points hike to reinforce this message. Still, in practice, the threat of continued intervention should be a powerful enough tool. Currently, the strategy would be profitable if EUR/CHF stays below about 0.99 versus the spot rate of 0.98 and Goldman’s 3-month forecast of 0.95
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The Swiss National Bank meet on Thursday, 22 June 2023 at 0730 GMT, 0330 US Eastern time. Preview here: