Jordan Readies to Back Switzerland's Faltering Franc

Above: File image of SNB President Jordan. Image © Pound Sterling Live, SNB.

The Swiss Franc jumped after the Swiss National Bank (SNB) indicated it was not comfortable with the rate of currency depreciation and GDP growth figures impressed.

The Pound to Franc exchange rate is down 1.30% in three days at 1.1518 after SNB President Thomas Jordan said in a speech the central bank could start selling foreign exchange reserves to defend its value.

"If upward risks to inflation were to materialise, this would be most likely associated with a weaker Swiss franc, which we could counteract by selling foreign exchange," said Jordan when delivering the keynote address to the 2024 Bank of Korea International Conference.

The Franc has been under pressure since the SNB cut interest rates and indicated that maintaining a strong currency was no longer a priority.

"After facing significant depreciation pressure in recent weeks, the CHF has seen some relief today. In our view, part of this likely stemmed from recent comments by the SNB Governor Thomas Jordan," says Charlotte Ong, European FX Strategist at HSBC.

"We are not surprised by the Governor’s remarks," she adds. HSBC recently turned bullish on CHF's prospects, noting the SNB may not have as much dovish capacity as its G10 peers. This is particularly relevant as Swiss inflation has proven more resilient of late than expected.

The past three months have seen the Swiss monthly inflation rate surprise to the upside; most recently, prices in Switzerland rose 0.3% m/m in April, higher than the 0.1% rate forecast.

Furthermore, some of the strength we are witnessing in the Franc today might also be down to some impressive growth numbers reported by Switzerland today.

According to the Federal Statistical Office, Switzerland’s GDP grew by 0.5% quarter-on-quarter in the first quarter, after a 0.3% gain in each of the prior two quarters and higher than the market estimate of 0.3%. This is the fastest pace of growth since the second quarter of 2022.

The strong growth was driven by services and retail, suggesting buoyant demand, which can limit the disinflation process.

The data provide important context to Jordan's speech expressing concern that a weaker Franc might contribute to inflationary pressures: clearly the issue is back on the radar and the SNB won't want to look as though it made a mistake by cutting too soon.

"The macro dynamics have changed since Q1, with price pressures proving stickier than expected and the currency weakening significantly on short CHF carry trades. Under such circumstances, an active ‘weak CHF’ stance may only aggravate inflationary pressures. This chimes in with the Governor’s comments today," says Ong.

HSBC says the Franc can remain vulnerable in the short term as markets continue to favour currencies that offer higher interest rates. But medium-term, analysts at the bank say the depreciation pressures on the CHF should wane in potency, and even more so if the SNB’s FX stance begins to shift.