Goldman Sachs Hike Swiss Franc Forecasts, Exit GBP/CHF Short

Image © SNB

The Swiss National Bank has delivered a "regime change" moment for the Swiss Franc outlook says Goldman Sachs who raise their forecasts for the currency, although they exit a 'short' recommendation on GBP/CHF.

"The SNB surprised markets with a 50bp hike last week and a change to its intervention framework. The move confirms our bullish view on the Franc," says Zach Pandl, Co-head of FX Strategy at Goldman Sachs in New York.

The SNB last week delivered one of the biggest surprises in the history of central banking courtesy of a surprise 50 basis point interest rate hike that took the policy rate to -0.25% and signalled the end of the negative interest rate era was drawing in.

The move was a significant intervention in that the SNB was expected to be one of the last major central banks to hike given a long-held policy of negative rates amidst sluggish domestic inflation rates.

But the surprising 50 basis point hike signalled the SNB believed a stronger CHF would assist in fighting imported inflation which is a major global concern given surging commodity prices.

A strengthening CHF means the cost of Swiss imports, most notably food and energy, comes down.

Goldman Sachs sees the SNB's decision as the strongest evidence yet of a "Reverse Currency Wars" thesis at play amongst global central banks; the era of targeting weaker exchange rates is over in favour of stronger rates in which to dampen the cost of essential imports.

Goldman Sachs assumes the SNB is "softly targeting" the real exchange rate, "and would like to at least push back on the 4-5% depreciation this year".

In the past the Swiss have regularly been labelled currency manipulators by U.S. authorities as they seek to artificially lower the value of the Franc to boost domestic inflation and ensure the competitiveness of Swiss exports.

Economists at the Wall Street bank assume the SNB's new inflation forecasts are consistent with further interest rate hikes and they look for 50bp hikes at the next three meetings.

"The Bank’s research and our own have found that a 1% appreciation in the currency can lower inflation by about 0.1-0.2%. Taken together, we think the Bank is likely to target about a 5% appreciation in the real exchange rate, which would put it around the post-2015 average," says Pandl.

Given the shifting fundamentals Goldman Sachs update their EUR/CHF forecasts to 1.00, 0.98 and 0.97 in 3, 6 and 12 months (from 1.01, 1.00 and 0.99 previously) and their end-2023 forecast to 0.95 (from 0.97).

Goldman Sachs have over recent weeks held a strategy recommendation to sell the Pound to Franc exchange rate in anticipation of CHF appreciation.

The trade has yielded positive returns already but Pandl says "the key catalyst has now passed" and they announce their exit.