Swiss National Bank confronts franc strength for first time since hiking began

FOR the first time since the Swiss National Bank began raising interest rates 18 months ago, the strength of the franc has become something for policymakers to chew over.

The currency rose to its highest against the euro since 2015 in the past week, well beyond levels that previously provoked officials to intervene in the market. So while borrowing costs will probably stay unchanged at the central bank’s meeting on Thursday (Dec 14), it’s less clear that the franc’s gains will go unrecognised.

Strategists at Wells Fargo, Société Générale, Raiffeisen Switzerland, and Monex Europe predict the SNB will send a signal aimed at tempering the currency’s gains – which could include toning down or removing a recurring phrase in their statement that implies a willingness to buy the franc. 

“There’s some anticipation for a relatively dovish shift, but I don’t think that’s fully priced,” said Erik Nelson, a currency strategist at Wells Fargo. “You could get a decent franc move, certainly if the SNB drops its statement language with regards to currency sales – but even if there’s a move on inflation forecasts or acknowledging that rate cuts could come, there’s still room for the franc to weaken.”

According to Nelson, the euro-franc pair could rise to around 0.9550, and would easily weaken by as much as 1 per cent if the language about foreign-currency selling is snipped.

SocGen strategists, meanwhile, recommend buying protection against the euro-franc pair rising to 0.96 over the next month. In the longer term, the bank sees the pair going above parity. 

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Analysts at Monex predict the rate at 0.95 by the end of the month, pushing away from the level of 0.94036 it reached last week – the strongest since the currency cap was removed almost nine years ago. 

The SNB’s language from Sept 21 statement:

“To provide appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary. In the current environment, the focus is on selling foreign currency.”

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The franc was trading 0.1 per cent weaker at 0.94668 per euro as of 10:46 am in London, leaving it 4.6 per cent stronger in the year.

Traders are preparing for choppy trading in the wake of Thursday’s meeting. One-week options in the euro-franc pair are the most overpriced since September 2022 compared with actual moves in the pair over the past week.

Since the SNB’s last policy meeting, inflation has slowed to 1.4 per cent – well within its target – giving officials some leeway to cool the best rally this year among G-10 currencies.

Now the concern is that excessive currency strength could dent the nation’s export competitiveness and slow growth, according to Simon Harvey, chief analyst at Monex. 

“It’s quite possible that the SNB chooses more balanced language this time,” said Alexander Koch, an economist at Raiffeisen in Zurich. BLOOMBERG