The Swiss National Bank (SNB) has expressed a heightened readiness to step in and influence the foreign exchange (FX) market, citing the current international climate. This move is aimed at curbing any rapid and excessive appreciation of the Swiss franc. In a previous post, I highlighted the timing of this announcement, noting that the US-Iran tensions were particularly inopportune for the SNB. This provides a crucial context for understanding the SNB's response. The question now is, where will the SNB draw the line in terms of intervention to limit the franc's strength, and how far are they willing to challenge market sentiment? Currently, the EUR/CHF pair is inching closer to the critical 0.9000 mark, with the low earlier today reaching 0.9035. Despite the SNB's comments, the pair is still down 0.4% at 0.9053. This raises the question: is this the point where the SNB might draw its first line of defense? It appears that verbal intervention is the initial step. However, it's worth noting that Morgan Stanley has argued there's still further downside potential, although this view was expressed before the escalation of the US-Iran conflict. The firm believes that the 12-month forecast of 0.87 for EUR/CHF is significantly undervalued by the market, with a decline to this level priced at only about 25% probability. Meanwhile, consensus forecasts place EUR/CHF modestly higher over the next 1-2 years. This underpricing suggests that long positions in CHF are attractively priced as a hedge for risk-oriented portfolios and as a safe haven against large, unexpected shocks. Short positions in EUR/CHF are also seen as attractive, and the recommendation remains to hold short positions targeting 0.87.
