Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Swiss National Bank’s bold move will kickstart the G10 rate cut cycle
Charu Chanana
Chief Investment Strategist
Summary: The Swiss National Bank's surprise rate cut has set off the G10 rate cut cycle, fueling pressure on other central banks to follow suit. Bearish CHF bias intact but USDCHF and EURCHF could be volatile as global monetary policy cycle catches up with the SNB’s rate cut and most other major central banks kickstart rate cuts from June. However, the CHFJPY cross could have more room on the downside as negative carry is minimal, and intervention threat for franc and yen is mis-aligned.
SNB’s surprise rate cut
The Swiss National Bank (SNB) surprised markets by slashing its key rate from 1.75% to 1.50%, marking the beginning of the G10 rate cut cycle. A rate cut was only priced in with ~30% odds by the market, and we had highlighted the case for a surprise cut in our Weekly Macro podcast on Monday.
This unconventional move underscores the SNB's response to persistent inflationary challenges, as inflation has been below the 2% target for nine months in a row. The central bank also lowered its conditional inflation forecasts and now expects inflation to average 1.4% in 2024 (vs. 1.9% forecasted in December), 1.2% in 2025 (vs. 1.6%) and 1.1% in 2026.
The appreciation of the Swiss franc (CHF) and risks of further upside as global easing cycle gets underway possibly underpinned the decision. While a strong CHF has been beneficial in curbing inflation, it has now become a double-edged sword, weighing heavily on the competitiveness of Swiss companies. By cutting rates, the SNB aims to stimulate growth and address currency challenges.
The market response was swift, with CHF depreciating against the USD and EUR. Swiss stocks also received a boost. The language on FX interventions has remained unchanged, but latest data suggests that the SNB is reducing FX sales as CHF strength has become a concern.
Other central banks would be wary of delaying rate cuts now
The SNB's move has broader implications for other central banks, signalling a shift towards looser monetary policies across major economies. The SNB decision came along with dovish tilts in much of the other central bank communications this week.
Most prominently, the Fed seemed to be unperturbed by the recent hot inflation prints, keeping the mid-year rate cut expectations beaming. The Bank of England also saw two MPC members dropping their votes to hike. The ECB commentary also remains dovish, and German and French PMIs for February suggest economic momentum remains weak. There seems to be an increasing case for most major central banks to start rate cuts by June. T
This would suggest that the next rate cut comes from Bank of Canada which meets on 5 June, if signals on Fed easing become clearer by then. Next would be ECB, which meets on 6 June followed by the Fed on 12 June and BOE on 20 June. The RBA and RBNZ could then start the rate cut cycle later in July or August. This is opening up increasing risks of dovish repricing for most major currencies, particularly CAD, EUR and GBP, as disinflation trends become more entrenched.
Market Implications
Bearish bias on CHF remains with SNB likely to cut again in June. CHF has already been an underperformer this year, and the rate cuts could signal an increasing preference to use the franc as a funding currency in carry trades in the current low FX volatility environment. USDCHF and EURCHF could continue to see further upside, but some volatile is likely if ECB and Fed data disappoints and dovish repricing catches pace. It may also be worth considering strategies to express a weak CHF view against JPY which has been stretched to the downside. Intervention threat for CHF and JPY is also mis-aligned, with Japanese authorities worried about excess yen weakness but Swiss authorities attempting to curb CHF strength. CHFJPY is testing the 168.50 level, and break could expose the 200DMA around 166.30.
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