Waning central bank support for the Swiss franc

On 17 January, the chairman of the Swiss National Bank (SNB) recognised that while a strong franc had helped quell inflation, it was also hurting Swiss firms. The later point may have a greater effect on the direction of the Swiss franc in the near term. Jordan's comments make it more improbable that the SNB will intervene again to prop up the franc unless the currency drops too fast or inflation rebounds too strongly for the central bank's liking. Indeed, given the relatively subdued economic outlook, Jordan’s comments would seem to increase the chances that the SNB follows other major central banks’ lead by cutting rates this year. In addition, recent data on capital flows also point to a less supportive environment for the franc in 2024.

We acknowledge that the downward pressure on interest rates globally may help the low-yielding Swiss franc through a narrowing of interest-rate differentials. As well as rising tensions in the Middle East (in the short term at least), the currency could also be helped by a resurgence of concerns among investors about highly indebted economies in an environment of higher interest rates. This could become a concern in some European countries and in the US ahead of the November presidential election. In such circumstances, the safe-haven franc could be expected to benefit from Switzerland’s low and stable debt-to-GDP.  However, should the global economic outlook improve later this year, as we believe, investors are likely to search for higher returns than those offered by Swiss assets.

Overall, our scenario remains unchanged from before. In the next three months, the Swiss franc may remain strong relative to the euro in the context of weak economic activity. But the expected deterioration in capital flows into Switzerland should eventually takes its toll on the franc and lead to some underperformance later this year. Our three-month projection is at CHF0.95 per euro while our 12-month projection stands at CHF0.99. Based on our EUR/USD forecasts, the implied USD/CHF rate is at CHF0.91 per USD and CHF0.90 on a three-month and 12-month time horizon, respectively.