Swiss Franc Could Weigh Further on Sterling, Dollar and Euro in Months Ahead

• Swiss Franc seen in early stages of a more protracted recovery
• GBP/CHF could slip sub-1.15 if USD/CHF reverses 2022’s rally
• EUR/CHF seen falling below parity as bearish forecasts mount 

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The Swiss Franc topped the major currency league table this week while also ascending through the rankings for 2022 following a landmark Swiss National Bank (SNB) policy change that could weigh further on the likes of GBP/CHF, USD/CHF and EUR/CHF in the weeks and months ahead.

Switzerland’s Franc had been one of the biggest fallers among major currencies for the year until the Swiss National Bank surprised economists and financial markets with a decision to lift its main interest rate from -0.75% to -0.25%.

That decision was a game changer for the Swiss currency, which has since outperformed all others within the G10 grouping and was also among the top performers on Friday when it was outpaced by only the Norwegian Krone in a market where risk assets were rising almost across the board.

“We have not really touched our EURCHF shorts in terms of position size but are becoming more emboldened here,” says Aniket Naik, a London-based FX trader at J.P. Morgan, who’s also a seller of GBP/CHF. 

“Sustained price action above 1.0140 would be a little disappointing in the short term but there is no need for reassessment until 1.0250+,” Naik said of EUR/CHF in a Friday market commentary.  

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

The SNB cited recent increases in Swiss inflation rates, which are still some of the lowest among major economies, and warned that further increases in the benchmark cannot be ruled out in a policy decision that has significant implications for the Swiss Franc outlook.

Swiss Franc assets already offered one of the better inflation adjusted returns out there by virtue of Switzerland’s relatively low rates of inflation but the SNB’s robust response to recent increases in price pressures now supplements this with what would appear to be an assurance of that return. 

“The SNB also changed its FX language and did not consider the franc "highly valued" anymore. Although the SNB is still willing to intervene in the market, this can now work both ways, i.e. it could buy or sell foreign exchange,” says Gunter Grimm, an FX strategist at Credit Suisse.

“In our view, the SNB has demonstrated that further franc strength is beneficial in reaching its inflation mandate, something we have long suspected. Consequently, we stick to our 0.9900 target for now, with the risks skewed to the downside,” Grimm said of EUR/CHF on Wednesday this week. 

This is bearish for the Euro because the SNB has effectively pipped the European Central Bank (ECB) to the policy normalisation post when many around the market had expected it to trail behind, which has since prompted a wave of forecast downgrades for EUR/CHF.

“We are rolling forward our 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 our end-2023 forecast to 0.95 (from 0.97), which we think is roughly in line with the SNB’s implied currency aim,” says Michael Cahill, a G10 FX strategist at Goldman Sachs.

Above: USD/CHF at weekly intervals with Fibonacci retracements of November 2021 and January 2021 trends indicating medium-term technical support for U.S. Dollar and resistance for Swiss Franc. Click image for closer inspection.

“We expect that the Bank will eventually sell some of its FX reserves to accomplish this, in line with President Jordan’s remarks in the press conference this week and his earlier comments that policy normalization will likely feature a combination of rate hikes and asset sales,” Cahill also said last week. 

Many analysts now expect EUR/CHF to fall to varying degrees below parity, although the extent to which it does is likely to be dependent on USD/CHF, which has reversed more than half of its 2022 rally since the SNB’s decision. 

“As the performance of USDCHF last week showed, 50bp SNB moves are worth more than 75bp Fed ones at this stage of the game,” Credit Suisse’s Grimm said on Wednesday this week. 

USD/CHF is a significant influence on both EUR/CHF and GBP/CHF because the latter two tend to closely reflect the relative performances of Sterling, the Euro and Swiss Franc when each is measured against the U.S. Dollar.

This is a relationship that would lead both GBP/CHF and EUR/CHF to fall in any market where USD/CHF continues to decline unless the Swiss Franc’s gains are offset by matching moves from Sterling and the Euro against the Dollar. 

The Pound would need to rise from 1.23 on Friday to 1.30 against the U.S. Dollar in order to avoid further losses against the Swiss Franc in any market where USD/CHF reverses the remainder of this year’s rally, and would risk falling as far as 1.12 if Sterling is unable to offset any such move. 

Above: Pound to Franc rate shown at weekly intervals with Fibonacci retracements of 2020 recovery indicating possible areas of medium-term technical support for Sterling and resistance for Swiss Franc. Click image for closer inspection.