The Swiss National Bank cuts must rely on FX interventions to dent the strength of the franc

The Swiss National Bank has reduced the cost of money from 1.25% to 1.0%. This is the third 25 basis point cut made by the monetary authorities, who, in March, were the first among developed economies to begin easing monetary policy. The cut was widely anticipated, but many investors believed its scale might be 0.5 percentage points. The milder adjustment does not affect the franc's valuation, which, alongside the yen, is the strongest gaining major currency this quarter. The EUR/CHF pair is just below 0.95.

Switzerland's battle against price pressure ended successfully much earlier than in other developed economies. Since June 2023, consumer inflation has consistently remained within the Swiss National Bank's desired range of 0-2% year-on-year. In August, it slowed from 1.3% to 1.1% year-on-year, positioning itself in the middle of this range. Price growth should not be a significant concern for central bankers in the near future either. Official projections for CPI growth in 2025 have just been sharply revised downward from 1.1% to 0.6% year-on-year.

The SNB did not need to raise rates as drastically as the ECB and the Fed. As a result, although Switzerland makes decisions about the cost of money only once a quarter, the rate cuts will also be finalized more quickly. After today's move, only one more cut is expected in December. The focus of monetary policy will shift towards actively countering the franc's strength, which is a growing demand from exporters. No later than mid-September, iconic watchmakers from this small economy made such a request. The strong currency was useful during the period of skyrocketing raw material prices and inflation fears. Today, it is primarily a burden, significantly reducing the competitiveness of Swiss goods.

The franc's decline in value at the beginning of the year, when the SNB surprised with its early rate cuts, did not turn into a lasting, long-term trend. The strength of the CHF relative to the euro or the dollar is currently only 2-3% below long-term lows. Although inflation in Switzerland is weaker than in other economies, trade-weighted measures and differences in inflation rates clearly indicate significant overvaluation.

The level of real interest rates is a fundamental factor supporting downward forecasts for the franc, suggesting a gradual return to parity with the euro. The SNB's monetary policy quickly ceased to be restrictive, but the franc, with its reputation as a safe haven, did not undergo long-term weakening. The Swiss currency traditionally thrives on global uncertainty, particularly political and economic difficulties in the eurozone. In the coming weeks, demand for it may be further fueled by the upcoming US presidential elections. In the third quarter of this year, the CHF benefited from a surge in the JPY, which triggered an investor retreat from carry trade strategies that involve financing the pursuit of high returns, including in emerging markets with defensive currencies.

Ultimately, the franc's depreciation pace will be dictated by the intensity with which the central bank purchases foreign currencies. We assume that patience is wearing thin, and the SNB will show high determination and tenacity in conducting interventions. Fintech Conotoxia assumes the euro and the franc should return to parity in mid-2025.