One of the major themes for financial markets during the 2020 pandemic is a lower U.S. dollar. The greenback’s decline helped central banks fight liquidity issues as the world needed dollars at the start of the pandemic. 

However, another dominant theme is the higher Euro. Not only the EURUSD strengthened during the pandemic, but all Euro pairs – with one exception, the EURCHF.

EURCHF, ECB, and SNB

EURCHF is one of the most interesting and difficult to trade currency pairs. It reflects the exchange rate between the currencies of two closely related economies. Yet, the proximity does not mean that the two central banks have similar monetary policy views.

On the one hand, the European Central Bank (ECB) sets three interest rates and holds one in negative territory – the deposit facility rate. While it does so for several years now, it was forced to keep an easy stance due to weak economic conditions.

On the other hand, the Swiss National Bank (SNB) has the lowest interest rate in the world. Set at minus 75 basis points, the SNB rate is mainly used to scare investors in the CHF. The SNB has made no secret that it constantly intervenes in the FX markets to weaken the CHF, but the success is not guaranteed.

If we look back in time, we notice that the SNB was forced to drop the 1.20 exchange rate floor in 2015 due to the ECB easing. The SNB took one of the biggest losses in its history, and there was nothing anyone could do to stop the CHF appreciating.

In the years that followed, the EURCHF recovered the lost ground, but it fell to 1.05 during the 2020 pandemic. While the Euro rallied across the board, and for good reasons, the EURCHF’s inability to follow might spell trouble for the EURUSD rally. In other words, if the Euro reflects the strength of the European economy, the EURCHF exchange rate would follow. It did not, suggesting that the EURUSD rally is just an anomaly, a result of different monetary policy decisions taken by the two central banks.

The EURUSD traded as high as 1.2175 last Friday. Also, the EURGBP or EURJPY followed higher, reflecting the strength of the Euro.

Yet, EURUSD bears have an unexpected ally in the EURCHF exchange rate. As long as it remains close to the current levels, it hints at a possible reversal in the Euro fortunes.