Head of FX Strategy
Key points:
The upcoming Swiss National Bank (SNB) meeting, scheduled for Thursday, is poised to be a significant event for market participants. With the current macro concerns centered on Europe, there is a degree of uncertainty surrounding the SNB's potential decision to cut rates by a further 25 basis points. While initial expectations leaned towards the SNB holding rates, the recent strength of the Swiss franc due to safe-haven demand has shifted the odds slightly in favor of a rate cut. The ongoing political turmoil in Europe, particularly in France, has contributed to the heightened demand for the Swiss franc as a safe-haven currency.
Swiss inflation has shown a relatively contained trend compared to other advanced economies. In May 2024, the inflation rate stood at 1.4%, unchanged from April but up from 1% in March. This uptick has primarily been driven by factors such as energy costs, including a rise in road fuel prices, and higher rents.
The SNB's March forecast, based on the assumption of rates remaining at the current level of 1.5%, projected inflation to hover around 1.4%-1.5% for Q2 to Q4 2024, before declining to 1.2% in 2025 and 1.1% in 2026. Even if June inflation eases slightly, Q2 inflation will remain on track to achieve the SNB projections, weakening the prospect of a rate cut.
The SNB has also been concerned about the increase in r* or the neutral rate of interest, which also poses upside risks to the inflation outlook.
While the Swiss franc has experienced a notable surge of almost 3% against the euro this month, the move has been largely influenced by hedging-related fund flows stemming from risk aversion, contributing to the franc's sustained strength. If the SNB sees this trend as temporary, it may be able to avoid a rate cut in June.
Meanwhile, a resurgent US dollar on the back of the Federal Reserve dot plot showing only one rate cut this year could bring franc weakness back after the French election driven haven rally subsides. Carry allure of the franc as a funding currency is also likely to remain intact in the low-vol summer months, creating further downside pressures on CHF.
Comments from Swiss National Bank’s president Thomas Jordan have hinted earlier that weaker franc is a key risk to Swiss inflation, and the central bank could counteract this by selling foreign exchange. This is further evidence to expect that without any significant economic pressure or inflation slide, there is little reason to expect the SNB to cut rates as early as June.
For now, haven flows into the Swiss Franc could continue to provide strength. USDCHF broke below 200DMA and EURCHF has returned to 0.95 for the first time since February. These downtrends could remain intact, especially if the SNB does not cut rates on Thursday. Support for USDCHF seen at 50% fibo retracement of the December low at 0.8778, and that for EURCHF is closer to the 0.94 level.
In case the SNB cuts rates, a somewhat weaker franc can be seen in a knee-jerk reaction but it is likely to be erased by haven flows. As long as USDCHF remains below 100-day moving average at 0.8961, the downtrend could remain intact. EURCHF also faces a strong resistance at 0.9595. Franc strength has also been pronounced against the JPY, with CHFJPY rising 4.8% in the last three months and at record highs.
Franc weakness on the back of a rate cut could, however, be more pronounced against AUD where the RBA has recently kept a rate hike on the table, and the GBP if BOE proves to be relatively more hawkish at its June announcement which is due just a few hours after the SNB announcement on June 20. AUDCHF could move back above 38.2% fibo retracement of the February low at 0.5916, while GBPCHF could move back towards 100-day moving average at 1.1326.
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