Swiss Rate-Cut Curve Ball Can’t Be Ignored as Banks Turn Against the Franc

(Bloomberg) — A handful of banks expect Switzerland’s policymakers will go against forecasts and cut interest rates in their first decision of the year.

Economists at Barclays Plc, Citigroup Inc., Julius Baer & Co Ltd. and others are among the few predicting the Swiss National Bank will deliver a reduction aimed at safeguarding the economy from potential currency strength. A surprise move, should it happen on Thursday, would come three months earlier than the majority envision.

While easing is seen as an outside possibility — and would be the first such step by a G10 central bank this cycle — there’s strong Swiss precedent for trailblazing on rates. Less than two years ago, the nation’s policy makers began hiking rates ahead of the European Central Bank.

“If I’m going to try and go long this week against one currency, it’s going to be the Swiss franc,” Samuel Zief, head of global FX strategy at JPMorgan Private Bank, told Bloomberg Television earlier this week. The SNB “always likes to throw curve balls,” he said. 

The logic behind a cut lies in the SNB’s once-in-a-quarter rate-decision schedule. Other central banks that meet more frequently have plenty of time to lower rates sooner, potentially leaving the Swiss with comparatively elevated borrowing costs, putting pressure on the franc to appreciate.   

On Wednesday, the franc sank to 0.9670 per euro, its lowest in four months. Even though the franc is down around 4% versus the euro this year, it’s still 7% stronger than in June 2022, just before the SNB began raising rates and supporting the currency to shield Switzerland from imported inflation.

Maxime Botteron, an economist with UBS Group AG in Zurich, predicts a first reduction in June, but highlights the fact that consumer-price growth has slowed to 1.2% in February compared with the central bank’s prediction of the rate averaging 1.8% over the first quarter. 

“The probability of a rate cut this week is not zero,” Botteron said. “Price pressures have eased significantly.”

Swaps markets are pricing a 39% possibility of loosening on Thursday, edging higher from earlier in the week. According to JPMorgan Private Bank’s Zief, a rate move would push the franc around 1% lower toward 0.90 per dollar and 0.97 per euro, a level last tested in November. 

A clutch of market metrics indicate pressure on the currency mounting. 

The latest CFTC positioning data show leveraged funds, which include hedge funds, boosted their bets for a weaker franc to their biggest in a year last week. 

Options pricing suggests some investors have positioned for a SNB cut, with one-week risk reversals hitting the most bearish levels on the franc versus the euro in more than two years. At the same time, the cost to hedge against swings in the franc versus the dollar ahead of the SNB decision has hit a one-year high. 

The franc also remains a favorite currency to sell against the yen this year, as investors bet on rates going higher in Japan.

Outside Bet

Still, in a week packed with rate decisions across the globe, most economists predict the SNB will hold off from cutting. 

Of 23 economists surveyed by Bloomberg, just five expect a decrease. JPMorgan Private Bank and State Street call the chance of a 25 basis-point reduction finely balanced. 

What Bloomberg Economics Says… 

“Some exchange rate appreciation at the end of last year had been a cause for concern for policy makers, but that has now reversed and the pressure on the central bank to act has eased. Combined with a resilient economy, we expect the SNB will consider it can still afford to wait until its June meeting before it starts cutting rates.”

— Maeva Cousin, senior economist. For full preview, click here. 

Botteron at UBS notes that Swiss growth is resilient. Even though he predicts a worse-than-average economic performance this year, it’s not currency strength that’s hurting foreign demand for the nation’s exports.

“With a rate cut, you don’t stimulate foreign demand,” he said.

Barclays currency strategists led by Themistoklis Fiotakis aren’t deterred. They’ve taken a long position in the pound versus the franc to position for “a substantial probability of a rate cut” this week. 

Sebastian Petric, head of FX research at LGT Bank Schweiz also expects a move, seeing a risk the euro could push higher versus the franc if the SNB were to again pivot ahead of the ECB.

While the Swiss currency has stumbled this year, one key source of support has been from real money investors who have held on to bets that it will appreciate, according to custodial flows data held by State Street. 

A cut this week could trigger a reversal of those positions, which could aggravate any franc selling in the coming months, said Michael Metcalfe, head of macro strategy at State Street Global Markets.

“Given how overvalued the franc is, there is a good argument for the SNB to move sooner rather than later,” he said. That’s “an eventuality that real money investors don’t appear to be positioned for,” he added.

–With assistance from Guy Johnson and Vassilis Karamanis.

(Adds franc price in 6th paragraph; updates SNB rate-cut pricing in 9th; updates and adds details on options pricing in 12th paragraph)

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