Positive on the Swiss franc

Along with a surprise 50 bps rate rise at its 16 June meeting, the Swiss National Bank (SNB) dropped the sentence that the Swiss franc is “highly valued” from its press statement. In addition, SNB chairman Thomas Jordan mentioned that the SNB would consider selling foreign currency if the CHF were to weaken. This is a major U-turn if one considers that SNB interventions in recent years market have all been designed to weaken the CHF.

The aggressive turn on rate tightening also suggests the CHF could be less penalised by the interest-rate gap going forward. Moreover, comparatively low inflation should continue to support the Swiss franc in the coming quarters. Indeed, the value of the franc has been eroded less by rising prices than other currencies such as the euro over the past year already.  From Jordan’s comments, it is clear the SNB is now happy to have a strong franc as the first line of defence against imported inflation. And the weakness of the franc in real terms in recent months suggests that Swiss exporters may not be penalised too much in the short term if the nominal rate remains strong.

Along with supportive inflationary differentials, the Swiss current-account surplus provides a structural tailwind for the CHF. In particular, trade flows, the main component of the Swiss current account, have been looking resilient to external shocks (notably high energy prices) thanks to Switzerland’s favourable energy mix and the high added value of its exports.

In view of all these favourable factors, our view of the CHF remains constructive. Our revised projections are for the CHF to attain parity against the euro over the next three months, before rising further to CHF0.98 over six months and to CHF0.96 over 12 months. The main risk to our positive outlook would be a sustained upturn in global risk appetite that weighs on the safe-haven Swiss currency.

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