On Thursday morning, the Swiss National Bank reduced interest rates from 1.5 to 1.25 per cent. The outcome of today's meeting was subject to considerable uncertainty and evoked extreme emotion. The cut was forecast by almost half of the participants in a Bloomberg survey and discounted by financial markets at just over 65 per cent. Shortly after the news of the cut, the franc, which had been the strongest of the main currencies in past weeks, weakened by around 0.5 per cent. As a result, the EUR/CHF turned back from around its multi-week low and returned above 0.95.
Swiss franc: a non-obvious continuation of SNB cuts
The SNB reduced the cost of money from 1.75 to 1.5 per cent in March, initiating easing as the first central bank of developed economies. Since then, the monetary authorities of Sweden, Canada and Euroland have followed in its footsteps. In the past weeks, doubt has arisen among market participants, and voices have begun to prevail that the cycle in Switzerland will be halted on the next occasion. There was no reason to do so, as price pressures have been particularly quickly contained in Switzerland and will remain under control in the coming years. The CPI dynamics have been within the inflation target since June 2023 and do not exceed 2 per cent y/y. The index reached a minimum of 1.0 per cent y/y in March, and in April and May it came in at 1.4 per cent y/y. All indications are that price growth will remain low. According to market forecasts, inflation is expected to reach 1.1 per cent in 2025 and 1.2 per cent in 2026.
Other factors have fuelled uncertainty about the Swiss National Bank's intentions. The economy is performing better than expected. In the first quarter of this year, the growth rate was 0.5 per cent q/q. The official projections of 1 per cent y/y GDP growth in 2024 quickly proved to be overly conservative. Moreover, leading indicators are increasingly heralding a recovery on the Old Continent. This means that supporting the economy with cuts has become a less pressing need and that they can wait.
In the past years, interest rates in Switzerland have not been raised as much as in other developed economies. The ECB's deposit rate has reached a record 4 per cent, and the Fed's minimum until September will keep the cost of money in the highest range of 5.25-5.50 per cent in more than two decades.
Swiss franc: the EUR/CHF rate to resume its' upward trajectory
The SNB meets only once a quarter and has less room for cuts. A ceiling of 1 per cent is seen as the target level and the natural interest rate. The franc's record strength against the main currencies has played an unsung role in containing price pressures. Once the threat of price growth becoming permanent above the permissible limit of 2 per cent y/y had been averted, an extremely strong currency was no longer desirable. The central bank reverted to its traditional preference for the CHF to weaken, bringing relief to exporters and supporting the economy. After the March cut, the franc came under pressure, and some central banks, led by the Fed, pushed back the start of easing.
The euro against the franc has rebounded by more than 7 per cent in a few months and has started to approach parity. The trend of the CHF weakening was welcomed at the SNB, but the dynamics of this trend were considered too abrupt. At the end of May, Governor Thomas Jordan unequivocally tightened the rate. Since then, the franc has been the strongest of the main currencies, with EUR/CHF moving 5 per cent away from the 1.0 barrier. The Swiss currency has also been strongly supported in the past weeks by the flight of investors from emerging markets, as well as by the outbreak of political risk and the massive turbulence in the French bond market, linked to the call for early elections after which Marine Le Pen's National Unity may take power.
A sharp appreciation of the franc is not welcomed by the Swiss monetary authorities, who will maintain a soft stance. Also, the recent strength of the CHF may have tipped the scales in favour of a cut. As Euroland's economic growth continues to rebound, this will allow the EUR/CHF to resume its gradual climb towards parity. This trend will be quieter than in past months, but within a few quarters, the franc and the euro should equalise in value.
This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.
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13 Jun 2024 11:00
Low inflation in the US turns back the dollar exchange rate
On Thursday morning, the Swiss National Bank reduced interest rates from 1.5 to 1.25 per cent. The outcome of today's meeting was subject to considerable uncertainty and evoked extreme emotion. The cut was forecast by almost half of the participants in a Bloomberg survey and discounted by financial markets at just over 65 per cent. Shortly after the news of the cut, the franc, which had been the strongest of the main currencies in past weeks, weakened by around 0.5 per cent. As a result, the EUR/CHF turned back from around its multi-week low and returned above 0.95.
Swiss franc: a non-obvious continuation of SNB cuts
The SNB reduced the cost of money from 1.75 to 1.5 per cent in March, initiating easing as the first central bank of developed economies. Since then, the monetary authorities of Sweden, Canada and Euroland have followed in its footsteps. In the past weeks, doubt has arisen among market participants, and voices have begun to prevail that the cycle in Switzerland will be halted on the next occasion. There was no reason to do so, as price pressures have been particularly quickly contained in Switzerland and will remain under control in the coming years. The CPI dynamics have been within the inflation target since June 2023 and do not exceed 2 per cent y/y. The index reached a minimum of 1.0 per cent y/y in March, and in April and May it came in at 1.4 per cent y/y. All indications are that price growth will remain low. According to market forecasts, inflation is expected to reach 1.1 per cent in 2025 and 1.2 per cent in 2026.
Other factors have fuelled uncertainty about the Swiss National Bank's intentions. The economy is performing better than expected. In the first quarter of this year, the growth rate was 0.5 per cent q/q. The official projections of 1 per cent y/y GDP growth in 2024 quickly proved to be overly conservative. Moreover, leading indicators are increasingly heralding a recovery on the Old Continent. This means that supporting the economy with cuts has become a less pressing need and that they can wait.
In the past years, interest rates in Switzerland have not been raised as much as in other developed economies. The ECB's deposit rate has reached a record 4 per cent, and the Fed's minimum until September will keep the cost of money in the highest range of 5.25-5.50 per cent in more than two decades.
Swiss franc: the EUR/CHF rate to resume its' upward trajectory
The SNB meets only once a quarter and has less room for cuts. A ceiling of 1 per cent is seen as the target level and the natural interest rate. The franc's record strength against the main currencies has played an unsung role in containing price pressures. Once the threat of price growth becoming permanent above the permissible limit of 2 per cent y/y had been averted, an extremely strong currency was no longer desirable. The central bank reverted to its traditional preference for the CHF to weaken, bringing relief to exporters and supporting the economy. After the March cut, the franc came under pressure, and some central banks, led by the Fed, pushed back the start of easing.
The euro against the franc has rebounded by more than 7 per cent in a few months and has started to approach parity. The trend of the CHF weakening was welcomed at the SNB, but the dynamics of this trend were considered too abrupt. At the end of May, Governor Thomas Jordan unequivocally tightened the rate. Since then, the franc has been the strongest of the main currencies, with EUR/CHF moving 5 per cent away from the 1.0 barrier. The Swiss currency has also been strongly supported in the past weeks by the flight of investors from emerging markets, as well as by the outbreak of political risk and the massive turbulence in the French bond market, linked to the call for early elections after which Marine Le Pen's National Unity may take power.
A sharp appreciation of the franc is not welcomed by the Swiss monetary authorities, who will maintain a soft stance. Also, the recent strength of the CHF may have tipped the scales in favour of a cut. As Euroland's economic growth continues to rebound, this will allow the EUR/CHF to resume its gradual climb towards parity. This trend will be quieter than in past months, but within a few quarters, the franc and the euro should equalise in value.
See also:
Low inflation in the US turns back the dollar exchange rate
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