Risk-Reward Favours Swiss Franc Downside say Swissquote, Eyes Turn to SNB Decision

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The Swiss Franc is currently well bid on global foreign exchange markets courtesy of the broad risk-off sentiment overshadowing global financial markets.

When investors are wary they tend to accumulate Swiss Francs owing to the currency's safety credentials.

However, the outlook for the currency is not without potential hurdles; on Thursday, the SNB will meet to broadcast their monetary policy strategy.

"In the light of higher domestic inflation, ECB “normalization” signal and mounting political risk in Europe, this generally sleepy meeting should get additional attention," says Peter Rosenstreich, an analyst with Swissquote Bank, the financial services provider based in Gland, Switzerland.

At its March meeting the SNB held sight deposit rates at -0.75% while reiterating the bank would remain active if necessary in the foreign exchange market.

"We anticipate a broadly dovish communication, particularly in the light of recent ECB forward guidance. Since the last statement, the CHF has generally appreciated ensuring that the “highly valued” term will remain," says Rosenstreich.

In addition, uncertainty in Europe, specifically in Italy will keep the SNB vigilant and Swissquote suspect that the near term inflation forecast and growth assessment will remain unchanged despite clear improvements.

Importantly, the SNB will avoid sparking any speculation that might cause CHF to appreciate.

Further, global growth and macro backdrop are a cause for concerns for the small alpine economy, which will provide plenty of coverage for the SNB.

"Interestingly, the SNB has expressed concerned over overheating of the housing markets. Even suggesting a need for a price correction. We are uncertain how the SNB will handle this issue," says Rosenstreich.

However, Switzerland's economic pulse continues to surprise to the upside with PMI surveys running above average, while GDP growth is coming off a strong 1Q.

Outlook for the CHF

Swissquote continued to see the SNB as one of the last G10 movers towards normalisation, i.e. raising interest rates back towards long-term averages.

Their call is for the first interest rate hike, is September 2019. This forecasts is based less on the trajectory of Swiss inflation and more the ECB policy path.

Rosenstreich and his team anticipate ECB asset purchase will end in 2018 and first rate hike March 2019, this give the SNB six month to judge the markets reaction on Euro before preceding.

"The significant lag between G10 central banks and the SNB and excellent candidate for global funding currency, suggests that risk rewards trade-off for the EURCHF remains to the upside," says Rosenstreich.

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