Swiss franc Forecast to Strengthen into Year-end Before Staging a Broader Retreat

• CHF to strengthen into year-end
• EUR/CHF forecast targets from Intesa Sanpaolo
• Capital Economics sees move back to parity
• GBP/CHF forecasted lower then higher

Image © Adobe Images

The Swiss Franc is tipped to make another push higher against the Euro and Pound over the coming weeks, but economists say 2023 will see a broader retreat by one of the world's favoured safe-havens.

The Franc is now the second-best performing major currency of 2022, having just slipped ahead of the Canadian Dollar in the performance stakes, but it continues to lag the U.S. Dollar owing to an 8% rise in USD/CHF.

The Franc's appreciation accelerated mid-year following the Swiss National Bank's surprise 50 basis point rate hike that showed the central bank's proactive approach in using monetary policy to contain inflation.

"It appreciated sharply starting in June," says Asmara Jamaleh, an economist with Intesa Sanpaolo. "The central bank abandoned the ultra-accommodative strategy in place since December 2014 and kicked off its interest rate hike cycle."

The fundamental shift in policy at the SNB decreases the attractiveness of the Franc as a funding currency used to buy higher-yielding assets in other countries.

At the same time, the SNB has boosted the attractiveness of the Franc for those international investors seeking to park value in cash amidst global uncertainty.

The Pound to Franc exchange rate is 12.00% lower for 2022 and the Euro to Franc is 7.00% lower.

"Rates are now back in positive territory after almost eight years, at 0.50%, following a 50 bps move in June and a 75 bps increase in September," says Jamaleh.

A stronger exchange rate meanwhile helps contain inflation and is therefore welcomed at the SNB.

"The sustained strength of the franc relative to the euro has been a key structural factor as to why underlying inflationary pressures have been much lower in Switzerland than in the currency union," says Jessica Hinds, Senior Europe Economist at Capital Economics.

But looking ahead, the Franc's appreciation trend could have a limited shelf life.

The SNB meets again in December and will face pressure to raise interest rates in order to keep pace with the European Central Bank (ECB) which is expected to raise rates in October and again in December.

Above: SNB rate hike path, market expectations and Capital Economics' forecast. Image courtesy of Capital Economics.

Failure to keep pace with the EBC (and the Bank of England which is expected to hike in November and December) could prompt a reversal in fortunes for CHF against the EUR and GBP.

Also arguing against further significant rate hikes is September's inflation reading that showed Swiss inflation dropped from 3.5% to 3.3%, against expectations for stabilisation at 3.5%.

Bear Market to Keep CHF Supported into Year-end

Intesa Sanpaolo also finds the Franc to be finding significant support from risk aversion as investors seek out its status as a haven.

This is particularly relevant in 2022 which has seen global stocks fall into a bear market.

Should markets extend the bear trend into year-end the Franc would likely appreciate further.

Above: "CHF generally supported by increased risk aversion" - Intesa Sanpaolo.

Intesa Sanpaolo says ongoing market anxieties related to the Russian invasion of Ukraine will maintain demand for the Franc.

The Federal Reserve's onslaught on interest rates is meanwhile seen as the ultimate determinant for market sentiment going forward with investors looking for a 'pivot' that sees the Fed start to slow its hiking cycle.

Therefore, Intesa Sanpaolo forecasts a potential rise to new highs in Franc over the short-term, pushing EUR/CHF into a EUR/CHF 0.94-0.90 range.

Pound Sterling Live estimates such a move would correlate with a decline in the Pound to Franc exchange rate to below support at 1.06 into the 1.02-1.06 region.

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Franc to Weaken in 2023

But 2023 should be a story of a more sustained bout of weakness in the franc as the SNB falls behind other central banks in the rate-hiking stakes.

"Core inflation is lower too, helped by the exchange rate and structural factors. Accordingly, the SNB won't need to have a monetary policy as restrictive as we think the ECB will require," says Hinds.

Capital Economics forecasts the Franc to weaken back to parity against the Euro over the course of 2023.

Intesa Sanpaolo also forecasts weakness on the back of an expected weakening in Switzerland's growth picture that leads to "a blander path of SNB rate hikes".

Intesa Sanpaolo forecasts for the franc against the euro are EUR/CHF at 0.94, 0.92, 1.00 and 1.02 on a 1m, 3m, 6m and 12m horizon.

This would correspond with a similar profile in GBP/CHF of lower in three months followed by a sustained, albeit modest recovery over a one-year timeline.

Further risks to CHF downside lie with a more sustained turn higher in global equity markets, which some economists say is possible in 2023 as inflation in the U.S. finally starts turning lower, allowing the Fed to end its rate hiking cycle.