Trade Corner

Where next for the Swiss Franc

by Macro D

In March, the Swiss National Bank (SNB) cut rates by 0.25% as expected, bringing them to 0.25%, the lowest level since September 2022.

It was a preemptive move aimed at discouraging further capital inflows into Switzerland that would cause the franc to strengthen again. It didn’t go very well. If we use the USD/CHF exchange rate as a reference, on March 20, it was around 0.88, while today, we are trading at around 0.81.

On one point, the SNB was not wrong: in March, the central bank did not foresee the possibility of further cuts. In fact, during the meetings in April and May, the President made it clear that by bringing rates close to zero, the future room for manoeuvre is now quite limited. That said, one door remains open, one that the Swiss Central Bank has never been afraid to pass through throughout its history. It is the door that leads to “direct intervention in the currency market”.

The latest financial market reports indicate that, even at the cost of not generating any positive returns, investors prefer to park their money in Switzerland rather than have it flow to more exotic shores. Why? The winds of war are forcing investors to appeal to the “Holy Grail of prudence”, supported by the prospect of both Swiss inflation close to zero and a narrowing of the rate differential with the United States, which could be directed into the arms of a recession that will force Powell (or more likely his successor) to cut the cost of money. That said, I believe that there are two price levels in particular that they can’t accept in Zurich.

Let’s dig in.