The Interbank Market Survey (IMS) at the end of February 2020 found that the outlook for EUR/CHF after the peak in late January has shifted to a neutral path as it was reported by more than 40 out of the most prominent commercial banks. A follow-up study, using an adjusted index of market sentiments, showed that only four out of eight respondents expected a further decline in the EUR/CHF.
This is the first time since December 2020 that the sentiment index for the EUR/CHF has shifted toward a more neutral scenario. This doesn’t mean that the outlook for the EUR/CHF is “great” or even “very good.” It simply means that the overall economic outlook in Europe’s Eurozone is now perceived to be improving and the chances of a further depreciation in the EUR/CHF are viewed to be very remote.
Over the past two months, the European Central Bank has also started its low-interest rate policy program, which may improve the economic situation in Europe. But it is worth noting that the ECB is under extreme pressure from the markets, especially those that buy German Bunds, to lower interest rates even further. So it is possible that the ECB could still keep the base rate near zero for some time.
Still, the longer-term forecast for the EUR/CHF seems to have become more positive than negative. As the EUR/CHF weakens, investors tend to shift their focus to other currencies that have depreciated more sharply – including the Japanese yen, Canadian dollar, Australian dollar and Swiss franc.
For example, in recent weeks, the Chinese Yuan has fallen sharply against the US dollar and so the scenario where the EUR/CHF would fall further is now looked as less likely. There is also the danger that China may go into a liquidity crisis and so the decline in the Yuan against the dollar will result in a further depreciation of the EUR/CHF.Since the Asian economic slowdown has worsened over the past six months, the British Pound is also struggling against the US Dollar, leading to a deterioration in the forecast for the EUR/CHF. Traders in the German markets have however successfully managed to pull the EUR/CHF back from the abyss in recent weeks. This is the first time since August 2020 that the average futures price for the EUR/CHF has come within $1.00 of its pre-crash level.
Most participants in the exchange-traded funds that purchase Chinese bonds and German Bunds remain bullish on the growth prospects for these countries, although they are hedging their bets with greater exposure to the US dollar. Those that are bearish see the EUR/CHF on negative momentum as the Chinese economic growth slows, and the Chinese Yuan continues to depreciate against the US dollar.
With the risks to the outlook for the EUR/CHF becoming greater, those that buy Russian and Ukrainian bonds are also starting to take a closer look at these two nations’ economic outlook. The risk that those that hold Russian and Ukrainian debt will be hurt by the ongoing political turmoil is now seen as a greater risk than the risk that the EUR/CHF will decline further.
China is also taking advantage of the weakness in the US Dollar and is working on encouraging the development of its own domestic industrial sector. This trend, in the long term, will ultimately strengthen the financial position of the euro and make it more attractive to investors than it is today.
A closer look at the international politics of the euro area, on the other hand, shows that there is no obvious movement to reverse the political consensus against Greece joining the euro. Yet political developments in the Middle East show no sign of stopping either.
There is also no obvious movement to remove the political support for the euro at present. If anything, the political debate over the future of the euro is likely to intensify.
The world economy is still facing very challenging conditions. Investors in the euro area have not yet priced in the challenges posed by demographic change, trade, financial instability and the impact of the slowdown in China. Thus the debate over whether to buy or sell the euro remains very much up in the air.