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Summary
- The Swiss National Bank (SNB) cut 25bp yesterday, less than the 35bp the market priced.
- The SNB significantly lowered its Swiss inflation forecasts from June, citing the strong CHF as a key driver of weaker inflation.
- The SNB was very clear it is ready to intervene in currency markets and says further interest rate cuts may become necessary in coming quarters.
Market Implications
- We still like buying EUR/CHF dips given the SNB’s resolve to counter CHF strength through intervention and easier monetary policy.
SNB Cuts Rates, but Leaves Room to Do More
The SNB cut 25bp yesterday and its accompanying statement was dovish.
The new inflation forecast ‘is significantly lower than that of June. The stronger Swiss franc, the lower oil price and electricity price cuts announced for next January have contributed to the downward revision.’
Given lower inflation forecasts, the SNB stated additional policy easing is in the pipeline.
The central banks said, ‘further cuts in the SNB policy rate may become necessary in the coming quarters to ensure price stability over the medium term.’
All this provides a bearish CHF backdrop.
The SNB’s explicit emphasis on CHF strength was also significant.
Swiss policymakers explicitly identified their strong currency as a reason for ratcheting their inflation forecasts lower. They are also ‘willing to be active in the foreign exchange market as necessary.’
We think this clearly signals intent.
The SNB would negatively view additional CHF strength. The central bank will push back concertedly against further appreciation through easier monetary policy and FX intervention.
EUR/CHF Remains Buoyant After Rallying Off 0.93 Handle …
Last month, we said we like buying EUR/CHF dips, highlighting the 0.93 handle as an attractive entry point.
We reiterated this buy-on-dips bias earlier this month.
And several days in recent weeks, EUR/CHF has traded on that 0.93 handle, which provided the level we sought to go long.
The pair has rallied in the past week after trading sub-0.9400, closing above that level every day since 11 September.
Chart 1: EUR/CHF Spot Rate = Orange Line
… So, We Like Buying EUR/CHF Dips
For most of 2024, EUR/CHF has traded in a ~0.9300/~0.9900 range.
When we first suggested buying EUR/CHF on dips in August, we thought the pair could return to the middle of the range outlined above.
We still think 0.9600 is a realistic target for EUR/CHF and therefore remain long.
Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.