USD/CHF rate has been over 1% up in just a few minutes

Another flash-crash was soon to reoccur in Forex. Holidays in Japan, low liquidity dark hour between the end of the US session and the beginning of Asian trade and...the Swiss franc crash by more than 1% during just a few minutes. Compared to the 8% drop of AUD/JPY in January, the crash in February can be safely called “mini”. Nonetheless, it is the fact: shocks happen from time to time. 9% drop of the South African rand in January, 2016; 6% drop of the GBP in October, 2016, the sharp surge of the yen, the crash of franc in January...What’s next?

As a result of the flash-crash, the USD/CHF daily range has broadened up to 110 pips, which almost as twice as many as the average indicator in the current year (56). However, the euro-Swiss franc volatility has not much increased, which signals that the shock is temporary. In addition to the lack of liquidity, one of its reasons can be a human error. Or...a well-planned action.

Dynamics of euro-Swiss franc volatility

Source: Bloomberg

Following the crash in January, JP Morgan made a survey, and the increase in the share of respondents, who believe that the main reason has been low liquidity, from 29% to 40%, proves that investors don’t rule out the same story in future. After all, what happened once may never happen again, but what happened twice will surely happen a third time.

As for the fundamental situation, after the Swiss GDP rate slid down into the red zone inQ3, 2018, the SNB should hardly start monetary normalization sooner than the ECB. According to the UBS, the regulator shouldn’t signal hiking the interest rate from the current -0,75% before March, 2020. So the interest rate won’t become positive until 2021. I don’t think that the Swiss National Bank will go its way and won’t join the regulators, insisting on the easy monetary policy. It will rather go on stressing holding the current interest rate. Or, it may hint at expanding the monetary stimulus, setting the bears for USD/CHF and EUR/CHF back.

The latter pair is very responsive to the political risks. With this regard, investors are positive about the fact that the League is getting more popular in Italy and may exit the coalition with the Five Star Movement. Italy bond yield is going down, as well as the spread with their German peers. Markets treat this value as the indicator of political risks in the euro-area.

Dynamics of EUR/CHF and Italy-Germany yield spread

 

Source: Reuters

Based on the fact that the EUR/CHF is highly likely to consolidate in the range of 1.12 -1.15, and the dollar gets back its shine, the USD/CHF bulls should have good chances to draw the rate up towards 1.024 and 1.038. These levels are good to look for sell positions amid the potential talks about the ECB monetary normalization, followed by the SNB.


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Price chart of USDCHF in real time mode

Franc got in a crash

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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