Swiss Franc Will be Limited: ABN AMRO

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The Swiss National Bank will fight Swiss Franc strength, according to a new analysis.

ABN AMRO has updated clients with the view that the Franc will find support from global geopolitical tensions and a ramping up of interest rate cuts at other central banks.

But, this won't be tolerated by the Swiss National Bank, which is already facing below-target inflation levels.

"It said that it is willing to be active in the foreign exchange markets as necessary," says Georgette Boele, Senior FX Strategist at ABN AMRO.

"Weakness in EUR/CHF is expected to be limited as the SNB does not want a strong franc considering inflation is below target," she adds.

On 26 September, the Swiss National Bank (SNB) reduced the policy rate by 25bp to 1.00% and said further cuts in the policy rate may become necessary in the coming quarters to ensure price stability over the medium term.

Furthermore, the new conditional inflation forecast of the central bank is significantly lower than that of June and are considerably below its target of 2%.

"The stronger Swiss franc, lower oil prices and electricity price cuts announced for next January have contributed to the downward revision," says Boele.

Thursday's Swiss inflation numbers for September came in below expectations, falling 0.3% in the month to September, taking the annual rate to just 0.8% from 1.1% in August.

The market is pricing in slightly more than one 25bp rate cut at the 12 December meeting.

"We agree with market consensus as inflation is below target and the franc is relatively strong," says Boele.

ABN AMRO expects SNB actions via the interest rate channel and direct interventions to limit CHF upside. The bank's year-end forecast for EUR/CHF stands at 0.94.