Swiss Franc on Track for Best Week of 2024 After SNB Warning

(Bloomberg) — The Swiss franc is about to finish its best week of the year against the euro and the dollar after the central bank hinted at possible action to bolster the currency. 

The franc has rallied roughly 1% versus both currencies in the past five days. Swiss National Bank President Thomas Jordan raised the prospect earlier this week of selling foreign exchange as a way to counteract the country’s higher levels of inflation. 

In the view of market strategists such as Lee Hardman at MUFG Bank Ltd, further weakness in the franc could prompt the central bank to slow the pace of interest rate cuts, or even intervene to sell foreign currencies. The franc has weakened dramatically in the first quarter of the year as Switzerland’s central bank delivered the first interest-rate cut of a Group-of-10 institution in this cycle. 

“The comments send a clear signal that the SNB will be less tolerant over further CHF weakness,” he said. 

For May, the currency is up nearly 2% versus the dollar, marking the end of a four-month streak of losses. Signs of resilient growth are also helping the currency as they have prompted a cut-back on bets for the SNB to cut interest rates in June. Swaps markets are currently pricing 42% chance of an easing next month, down from 66% at the start of May. 

While Jordan’s comments were “something of a warning shot” according Erik Nelson, a strategist at Wells Fargo, they were not strong enough to suggest the bank plans to sell foreign currencies to bolster the franc like it did in 2022 and 2023, he said.

“This is not in our view a dramatic enough move to shift the SNB’s view of the franc to the point where it will be compelled to intervene in FX markets,” Nelson added. 

Since the start of the year, the franc’s low yield has made it a popular currency to borrow to fund carry trades with, a trend that tends to weigh on the franc.

“It would likely take a more dramatic shift from Jordan or a much hotter-than-expected Swiss CPI print next week to derail the attractiveness of CHF as a funding currency,” he said.

(Updates prices, adds analyst comment from paragraph 8)

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