Swiss Franc Vulnerability Could Grow if ECB Pushes On with Policy Shift 

• -Swiss Franc under pressure from USD & resilient EUR 
• -U.S. bond yields weigh as ECB decision looms ahead
• -ECB normalisation grows as threat for CHF/EUR et al
• -Stokes risk of medium-term CHF/USD, CHF/JPY slide 

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The Swiss Franc came under pressure from the Dollar, Euro and others in the mid-week session but would potentially be left at growing risk of further declines over subsequent weeks if the European Central Bank (ECB) continues on Thursday with its pivot toward a normalised monetary policy.

Switzerland’s safe-haven Franc had given little ground to a rallying Euro during the opening session of the week as the currency market digested results of Sunday’s first round voting in the French presidential election, which left the incumbent with a clear lead over his nearest rival.

But the Swiss currency was giving ground by the mid-week session as the Dollar advanced broadly and seemingly in response to elevated U.S. government bond yields, while also being restrained in its advance against the Euro ahead of this Thursday’s ECB policy decision.

“In the meantime, market interest around tomorrow’s ECB decision has been piqued by talk of a new policy tool to contain fallout in spreads from external risks,” says Shahab Jalinoos, head of FX trading strategy at Credit Suisse. 

Above: USD/CHF shown at daily intervals alongside JPY/CHF and EUR/CHF. Click image for closer inspection. 

Bloomberg News reported earlier this week that ECB policymakers are devising a mechanism that would limit upward pressure on bond yields in more financially fragile Eurozone economies after the possibly-approaching point when the bank stops injecting new stimulus into the Eurozone economy.

“Further efforts to ring-fence peripheral debt are likely to be seen as creating leeway for a more hawkish stance on the policy rate front. This leaves our limited downside EURUSD target at 1.08 intact for now, or at least until the French runoff vote on 24 April,” Credit Suisse’s Jalinoos said on Wednesday.

If succesful in designing such a mechanism, it could potentially enable ECB policymakers to feel more comfortable about ending the last of the two quantitative easing programmes operated by Frankfurt since at least the onset of the coronavirus crisis.

That would in turn, and in theory bring closer the date at which the ECB might then be willing and able to contemplate an eventual uplift in its interest rates, which have been set at zero percent or below since 2014. 

“Will the ECB be sufficiently hawkish to validate that market pricing with the collapse in consumer confidence, the conflict in Ukraine and warning signs from China’s lockdowns? Or will it take a more cautious approach,” asks Jordan Rochester, a strategist at Nomura, in a Tuesday research briefing. 

Above: EUR/CHF shown at daily intervals alongside JPY/CHF and EUR/USD. Click image for closer inspection. 

To the extent that Thursday’s decision keeps the ECB on track for monetary policy normalisation, and leaves open the prospect of it meeting financial market expectations during the months ahead, it could also potentially help to underpin the EUR/CHF exchange rate.

That would add further pressure to the overall and trade-weighted Swiss Franc, of which the single currency comprises a far larger share than any other currency, and just at a time when the Franc is also beginning to come under pressure from a rampantly strong U.S. Dollar.

The Dollar has been charged up by significant increases in U.S. government bond yields resulting from the evolution of Federal Reserve interest rate policy is another risk to the Swiss Franc, which has been an outperformer among the perceived safe haven currencies in recent trading.

“If yields are heading higher in Europe, they are heading much higher in the US, where growth expectations will be less affected by the Russia-Ukraine conflict, whereas Europe is more exposed to higher energy prices and lockdown risks/slowdown in China,” Nomura’s Rochester also said.

Above: GBP/CHF shown at daily intervals alongside USD/CHF and EUR/CHF. Click image for closer inspection.