Swiss Franc Struggles after SNB Statement but U.S. Election, Brexit to Keep the Buyers Coming 

Image © SNB

• GBP/CHF spot rate at time of writing: 1.1789
• Bank transfer rate (indicative guide): 1.1376-1.1459
• FX specialist providers (indicative guide): 1.1612-1.1683
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The Franc was left struggling Thursday after the Swiss National Bank (SNB) reiterated a threat of intervention on behalf of the economy and in the name of domestic inflation, although the nearing U.S. election and ongoing Brexit process are tipped to see the safe-haven currency recover before long. 

Switzerland’s Franc advanced on ‘high beta’ commodity currencies Thursday but ceded ground to other safe-havens as well as a recovering Pound Sterling after the SNB said it's “still highly valued” and warned the bank is “willing to intervene more strongly” to reduce upward pressure on the currency. 

This was after the SNB left its interest rate unchanged at -0.75%, in line with market expectations, while reiterating a willingness to invervene in order to limit appreciation of the currency. The bank also upgraded its GDP forecasts, citing "a significant pick-up in economic activity," since the national coronavirus shutdown was lifted in Switzerland and other countries.

"While policymakers could cut interest rates a bit further, they will probably only do so if the ECB were to reduce its deposit rate," says David Oxley at Capital Economics. "We expect the SNB to leave rates on hold at -0.75% throughout our forecast horizon and, in all probability, until at least later this decade." 

After having cut its main interest rate far below zero the bank has for years opted to use transactions in the foreign exchange market to "stabilise economic activity" and counter downward pressure on inflation, which is often the result of exchange rate strength rather than ebbing momentum in the economy.

Above: Swiss Franc performance against major currencies in 2020. Source: Pound Sterling Live.

"It will now publish data on the volume of its foreign exchange market interventions on a quarterly basis instead of just annually. This will therefore provide a clearer picture of the situation. It cannot be ruled out that this decision is linked to the fact that Switzerland is on the US authorities watch list for currency manipulation, and this additional transparency is intended to allay US fears," says Charlotte de Montpellier, an economist at ING.

Strong or rising exchange rates can stifle export competitiveness, incentivise economy-eating imports and reduce inflation if and when lower cost imports are reflected in consumer prices, although a safe-haven appeal means the Franc and SNB are often burdened by currency appreciation. 

The Euro-to-Franc rate is the one which has the most influence on Swiss inflation and export prices, although the exchange rate has only ever fallen. The central bank has been powerless to prevent declines although it can slow the pace of Franc appreciation and has sometimes been known to cause large movements in Swiss exchange rates. 

Above: Euro-to-Franc rate shown at daily intervals alongside S&P 500 index futures (green line, left axis). 

"We think the SNB has accepted (along with some other European CBs) that negative rates are a blunt tool to combat the current growth headwinds," says Kamal Sharma, a strategist at BofA Global Research, who's a seller of the GBP/CHF rate. "A number of key metrics that traditionally drove the currency have broken down. The one that continues to hold is EUR/CHF versus relative equity moves. This could be pertinent in the months ahead and why we maintain a bearish view towards the pair."

Given the SNB's focus on constraining EUR/CHF weakness the exchange rate is a less effective mechanism for those who want to bet on the Franc and benefit from its safe-haven qualitites, which is one of the main reasons why Sharma and the BofA team are selling GBP/CHF instead. 

The Franc was soft against major currencies on Thursday but is expected to advance again in the months ahead, especially against riskier prospects like the Pound, which will be navigating the last legs of the Brexit trade talks as November's U.S. presidential election plays out. 

Above: Euro-to-Franc rate shown at monthly intervals. 

"The prospects for sustained CHF appreciation will ultimately hinge on whether there is a vol moment in markets. The US Presidential Elections and Brexit are two such scenarios where we see acceleration in CHF strength beyond 0.90 in USD/CHF and 1.07 in EUR/CHF," Sharma says.   

Odds may have moved in favour of a Brexit trade agreement this week but Wednesday saw President Donald Trump give the clearest indication yet that he'll contest the outcome of the U.S. election if he loses, following months of complaint about the proliferation of mail-in voting. 

The incumbent told reporters on Wednesday that he wants to secure confirmation of a replacement for the late Justice Ruth Bader Ginsburg before the November 03 election because "..this scam that the Democrats are pulling — it’s a scam — this scam will be before the United States Supreme Court."

"GBP is one of the most rate-sensitive in G10. With Brexit uncertainty, the strains in the UK's external and domestic imbalance will be exposed. Following the recent GBP sell-off, we argued that Brexit complacency suggests further GBP downside and higher vol. We went short GBP/CHF on July 29, spot ref 1.1870...We remain bearish GBP/CHF following the recent move lower."

Above: Pound-to-Franc rate shown at daily intervals, following the Pound-to-Euro rate (green line, left axis).