G10 FX Weekly: SNB and Swiss Data Put Paid to EUR/CHF Upside (for Now)

Summary

• Comments from Swiss National Bank (SNB) President Jordan on inflation and the Swiss franc (CHF) have driven the biggest one-day decline in EUR/CHF since October. The pair is now poised for its worst week of 2024.
• The franc also found support from the much stronger-than-expected Q1 Swiss GDP data.

Market Implications

• We stand aside in EUR/CHF, waiting for a deeper pullback before considering going long again.
• For the coming months, we expect the pair to trade in a ~0.9300/~0.9900 range, with the Jordan comments and Swiss data cementing the top end.

This Week’s EUR/CHF Pullback Has Been Aggressive

Until this week, our dip-buying long EUR/CHF bias had been one of our preferred (and best-performing) trades of 2024.

However, comments from SNB President Jordan and stronger-than-expected Swiss Q1 GDP put us back on the sidelines in EUR/CHF, awaiting better signals.

Essentially, the SNB has now set the parameters for EUR/CHF for the coming months. We expect the pair to trade in a ~0.9300/~0.9900 range.

What Did the SNB Say?

Jordan’s comments this week put a ceiling on EUR/CHF, with the currency pair on Thursday retreating the most since October. It is now poised for its worst week in 2024.

Jordan said there was ‘small upward risk’ to the SNB’s inflation forecasts, noting the natural rate of interest has increased somewhat or might rise in the coming years.

Perhaps more importantly for CHF, Jordan said the weakening currency is currently the most likely source of higher Swiss inflation and that the SNB could counteract this by ‘selling foreign exchange.’

On the surface, these statements are both logical, and should not have come as a massive surprise to markets.

Given the one-way upward traffic in EUR/CHF in recent months, however, the comments were a stark reminder of the two-way risk that exists in the pair. This is especially so given Jordan’s comments on selling foreign currencies against the franc. And adding in the stronger-than-expected Q1 GDP data, the pullback makes more sense.

The SNB’s Shift in Messaging Was Notable

Jordan’s comments were so impactful because they represent a shift in tone and substance from SNB communications throughout this year.

Earlier this year, the Swiss central bank lamented the role of the CHF in slowing the economy.

To combat this, in recent months, the SNB has explicitly said it no longer favours buying CHF in the FX market, even though it reserves the right to intervene in the FX markets (which may also mean selling CHF).

And, in March, there was that surprise rate cut.

So, to hear Jordan speak of potential upside risks to the SNB’s inflation forecasts, and say the SNB could resist this by selling foreign currencies against the franc, explains the handbrake turn in EUR/CHF.

SNB Pricing Is Less Dovish Now

Following the surprise 25bp SNB rate cut in March, the probability of a rate cut next month has slowly and steadily receded.

In the first week of April, the probability of another 25bps rate cut at the next SNB policy update on 20 June stood at over 90%.

By the end of April, that probability fell to 40%. At the close of business yesterday (30 May), the probability was 33%.

Looking at the June three-month Swiss SARON contract, which is very sensitive to SNB policy and a good proxy for the Swiss short end, implied yields troughed in early April, and have trended upward, gathering momentum in the last week or two.

This less dovish monetary policy pricing profile makes sense given Jordan’s remarks and the strong data. With it, downside pressure on CHF and upside pressure on Swiss yields is to be expected.

The SNB Has Choked Off EUR/CHF Upside

Jordan’s comments make it clear the SNB does not want EUR/CHF to appreciate much beyond its recent high, just above 0.9900.

This means that the currency pair will likely trade within a ~0.9300/~0.9900 range in the coming months. Lower levels may make dip buying attractive again, but we think this will require patience.

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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.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)