Swiss Franc's Declines Have Just Begun After SNB Changes Tack

Authored by Ven Ram,. Bloomberg cross-asset strategist,

The franc recoiled the most in well more than a year against the dollar last week. 

The Swiss currency has further to fall this year.

The franc’s 1.9% decline, which may look outsized at first sight, needs to be seen in the context of a currency that surged almost 9% through the last quarter.

The drop has further to run given that the Swiss National Bank, which had changed tack to buying the franc to quell imported inflation through much of the current policy cycle, abandoned that stance in December.

As a reminder, that strengthening wasn’t lost on the SNB, whose President Thomas Jordan remarked last week:

“For quite a long time we had mainly a nominal appreciation - that was very helpful, because that shielded us from the inflation pressure from abroad.

In the last couple of weeks of last year, we saw real appreciation. That makes the situation for some of our firms more difficult.”

That brings the SNB to its more familiar role of containing inordinate strength in its currency, a stance that it held for years on end before it started raising interest rates in 2022.

The SNB torpedoed the markets in June 2022 when it surprised the markets with a 50-basis point rate increase, which came one month before the European Central Bank’s hike.

Given that the ECB seems to be converging on a rate cut in June, the SNB has to cut rates in March if it wants to get a head start again...

...while the SNB meets in June, too, its review is scheduled later than the ECB’s - not to mention the Fed...

A rate cut would expose those long the franc against the dollar to carry bleed because of the already considerable interest-rate differentials.

The negative carry is now almost 1.45 basis points a day.

While that wasn’t much of a hurdle to overcome when the SNB was selling foreign currencies to contain inflation, it is a significant barrier in the context of a central bank that is confident that inflation will moderate toward its target in the coming months.