Swiss Franc to Stay Under Pressure on SNB Cut, Analysts Say

(Bloomberg) — The Swiss franc is likely to stay under pressure after a surprise interest-rate cut by the country’s central bank showed policymakers are acting more forcefully to prevent any appreciation in the currency.

The currency tumbled on Thursday to an eight-month low versus the euro after the Swiss National Bank cut its key interest rate by 25 basis points and lowered its inflation forecast. Against the dollar, it hit the lowest since Nov. 14. The franc’s trade-weighted index, compiled by Deutsche Bank, fell 0.9% to levels last seen in early July. 

Analysts from Wells Fargo and Monex Europe think that level is still too strong for policymakers’ liking, with HSBC Holdings Plc and Rabobank expecting franc weakness to continue.

That’s a turnaround after the franc rallied last year to the strongest since 2015, dragging inflation well below the SNB’s target and spurring speculation over whether a rate cut was imminent or whether the bank would continue to sell the currency in the market directly.

Read more: SNB Surprises With Rate Cut, Moving Ahead of ECB and Fed 

Here’s a roundup of what FX strategists are saying about the franc:

HSBC’s Dominic Bunning, head of European FX research

• “The CHF has already been an underperformer this year and is now likely to extend this underperformance. Being the first G-10 central bank to cut will undermine the currency for a carry perspective with the CHF likely to be increasingly seen as a funding currency of choice in a world of low FX volatility.
• “The language on the currency by the SNB was neutral, with the central bank “willing to be active” in the FX market if necessary. We believe the SNB has taken a more neutral stance in FX policy in recent months, rather than actively seeking a weaker currency. This stance may be challenged in the months ahead with the CHF now weakening in real terms, but this is unlikely to provide an impediment to CHF weakness for now.”

Monex Europe’s Simon Harvey, head of FX analysis

• “Today’s decision suggests that the franc’s underperformance year-to-date isn’t substantial enough for the SNB’s liking; a point the FX market has received loud and clear.
• “The SNB’s decision to cut today is motivated by the Bank’s preference to avoid FX intervention between meetings. This is not only motivated by the operational losses such actions generated over the course of the tightening cycle, but also the reduced impact FX intervention has to weaken the currency in an environment of higher interest rates. By cutting rates at today’s meeting, the SNB allows itself greater bandwidth for the franc to trade without forcing it to intervene ahead of June’s meeting.
• “The SNB’s decision to lead the developed-market easing cycle confirms the franc’s status as the most viable G-10 funding currency, both due to its lower rates and the SNB’s intolerance towards further CHF appreciation. This should see the franc continue to underperform over the course of the second quarter.”

LGT Bank Schweiz’s Sebastian Petric, head of FX research

• “We have to acknowledge that the SNB moved before the ECB and the Fed. This is somewhat remarkable.
• “The key point is that they are cutting rates over FX interventions to weaken the CHF. The rhetoric from the SNB has evolved to recognize the adverse effects of a strong real effective exchange rate on the Swiss economy. This cut has the effect of weakening the CHF and supporting the economy.”

Rabobank’s Jane Foley, head of FX strategy

• “This was a perfect opportunity for the SNB to amplify this year’s softer tone in the CHF.
• “Inflation in Switzerland is already low at 1.2% yr/yr and the country has a long history of struggling with deflation and disinflationary pressures linked to an overvalued exchange rate.
• “The SNB’s decision to cut rates this month will likely further the probability that the CHF could be used as a funding currency, particularly if the SNB signals that it is prepared to match ECB rate cuts this year.
• “For now the CHF is likely to remain soft. We have brought forward our previous EUR/CHF six-month forecast of 0.98 to a three-month view.”

Danske Bank’s Kirstine Kundby-Nielson, FX and rates strategist

• “From the wording of the statement, the materially lower inflation forecast and the cut today, we think this lays the groundwork for another cut in June.
• “The cut today lowers the likelihood for a larger 50bp move in June, but this can naturally not be ruled out given the few meetings. For now, we do not expect the SNB to start intervening to weaken the CHF with policy divergence to weigh on the CHF in the near term.”

Wells Fargo’s Erik Nelson, macro strategist

• “It was quite dovish, not just the decision itself but the accompanying guidance, as you would expect given a surprise cut.
• “They are still describing the Swiss franc as having a ‘dampening effect’ on Swiss growth, and cited the ‘appreciation of CHF in real terms over the past year’ in deciding to cut rates today. So the 4-5% year-to-date decline in CHF does not seem to faze them much, as they still seem to think it is too strong in real terms.”

UBS Global Wealth Management’s Solita Marcelli, chief investment officer Americas

• “The SNB move reflects a broader confidence that the global inflation threat has passed.” It also “validates our view that the global rate-cutting cycle is getting under way.” UBS expects both the Fed and the ECB to ease policy in June.
• The preemptive easing of Swiss monetary policy has the potential to send EUR/CHF to the upper end of the firm’s expected 0.95-1.00 range. “However, we don’t expect the euro to rise above parity, given headwinds for the Eurozone from weak growth and a greater vulnerability to geopolitical risks.”
• UBS is sticking to its long Australian dollar and long Brazilian real positions funded with shorting the Swiss franc.

(Updates with UBS comment and trade-weighted exchange rate)

©2024 Bloomberg L.P.