Swiss Franc: Franc weakness seen slowing near 0.95 against Euro – Commerzbank

Commerzbank’s Michael Pfister highlights notable Swiss Franc weakness since July, with EUR/CHF approaching 0.95 as markets price more European Central Bank (ECB) tightening than from the Swiss National Bank (SNB). He argues the SNB is likely comfortable with higher EUR/CHF and will keep guidance largely unchanged. Expectations between Euro area and Switzerland cannot diverge much further, suggesting EUR/CHF upside may slow around 0.95.

SNB likely comfortable with weaker Franc

"Since the beginning of July, the Swiss franc has weakened considerably; EUR/CHF has risen steadily from around 0.92 to occasionally approach 0.95. The reason for this is fairly obvious: the price of oil has risen significantly and expectations regarding the ECB have continued to increase. But the market has not priced in a similar degree of tightening from the SNB. Consequently, the expected difference in monetary policy tightening by the end of December has more than doubled. This leaves three possible outcomes for today's SNB decision:"

"Do officials see scope to rebuild a buffer for interest rate cuts? This question has been circulating for some time. Proponents essentially argue that now might be the time to raise interest rates so that there is scope for rate cuts again in the event of another crisis. While this may sound reasonable, the SNB’s interest rate cuts from 1.75% to 0% in recent years have had virtually no effect. Each rate cut has briefly weakened the franc on the day of the meeting, only for it to resume its appreciation trend afterwards. One or two interest rate rises are unlikely to achieve a different outcome through rate cuts in the event of a future crisis."

"Are the authorities concerned about the weak franc? In recent years, they have often emphasised that they respond to inflation with interest rate changes and to excessive CHF movements with interventions (and interest rates). Four years ago, they deployed substantial funds to artificially strengthen the franc and thus mitigate imported inflationary pressure. However, times have changed since then, and the SNB no longer seems quite so keen to resort to strong interventions. As inflation remains rather subdued, unlike four years ago, the time for such a shift is probably not yet upon us."

"Is the SNB perhaps simply satisfied with the latest developments? We consider this to be the most realistic assessment. In March, it intervened verbally several times to prevent the franc from appreciating further. Higher EUR/CHF levels are therefore likely to suit it quite well. Furthermore, the SNB is also expected to raise interest rates following the rise in oil prices, though not quite as sharply as the ECB. This suggests that the market believes the SNB is capable of responding to higher inflationary pressures. Even though there have recently been reports that the SNB expects no change in interest rates until the end of 2027, it is probably still too early to revise expectations for the coming year."

"In light of these arguments, we strongly anticipate that the SNB will not introduce any significant changes to its guidance today, merely reiterating the risks. But, it should be clear that expectations between the euro area and Switzerland cannot diverge much further. In other words, at levels around 0.95, EUR/CHF is likely to start slowing down, as we have already seen in recent days."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)