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Summary
- Switzerland’s August inflation data came in weaker-than-expected across the board.
- This would normally lead to CHF weakness, but softer global risk sentiment this week resulted in the currency tracking sideways, with CHF haven demand offsetting weaker Swiss data.
- As we wrote last month, we think the Swiss National Bank (SNB) will intervene in the FX markets (initially verbally, followed by selling CHF if needed) to prevent the currency strengthening further.
- Additionally, we think the SNB will almost certainly cut rates when it meets on 26 September, with a good chance of more aggressive easing than current market pricing suggests.
Market Implications
- As a result, our bullish EUR/CHF view is stronger. We like buying dips in EUR/CHF.
Recent Swiss Inflation Data Was Weaker-Than-Expected
Switzerland’s August CPI data was released earlier this week and came in weaker-than-expected across the board.
On a MoM (0.0%) and YoY (1.1%) basis, including the additional EU harmonised readings, the data prints were softer than consensus expectations.
Moreover, analysing each line item in the inflation report shows that outside of rents and a handful of other line items, many goods and services inputs in Swiss CPI are negative. This proves disinflation is happening.
When providing its most recent monetary policy update in June, the SNB said it expected annual CPI to come in at 1.5% in Q3. So far, the Q3 readings have both been softer than the SNB forecast.
This Points to an SNB Rate Cut in Three Weeks’ Time …
As a result, we think an SNB rate cut is nailed-on when they update monetary policy on 26 September.
For us, the only uncertainty is whether the SNB cuts 25bps or 50bps.
The market is split between those two possibilities, currently pricing ~32bps of easing in three weeks’ time.
We interpret this as leaning slightly towards a 25bps cut, but the margins are fine.
Looking at the 2-year SARON swap yield (as a proxy for broader Swiss short-end yields), the 2-year yield is at its lowest level since 2022, when the SNB began its recently concluded tightening cycle.
Chart 1: Swiss 2-Year SARON Swap Yield = Orange Line
We think the SNB is willing to act aggressively because of the weak inflation data, especially given the string of weaker inflation prints is now a solid trend.
Chart 2: Switzerland YoY CPI Rate (in %) = Orange Line
For us, this points to a higher probability than the market is currently pricing for a 50bps SNB cut this month.
… And Verbal Intervention to Weaken CHF
The strong CHF is a key reason Swiss inflation is decelerating.
Swiss-based economists increasingly say the strong currency means Switzerland is importing disinflation and that this dynamic could worsen the longer the currency remains strong.
Even if the SNB does not cut more aggressively than the market currently prices, we confidently assert that the central bank will ‘verbally intervene’ in the FX markets when it updates monetary policy in three weeks.
This will take the form of previous monetary policy statements, where the SNB explicitly flags the strong currency as a problem, with ‘verbal intervention’ consisting of the central bank saying it stands ready to intervene in the FX markets to weaken CHF.
Beyond this, should an aggressive cut and verbal intervention not weaken CHF materially, we think the SNB will sell the currency in the market to counter its recent strength.
We Therefore Like Buying Dips in EUR/CHF
As a result, the recent Swiss inflation data strengthens our buy-on-dips bias.
We think the only reason CHF has not weakened yet, essentially trading at similar levels to this time last week, has been the demand for CHF as a haven in response to the souring of global risk sentiment this week.
Nonetheless, with EUR/CHF now trading on a 0.93 handle, we think the pair remains a buy-on-dips.
Chart 3: EUR/CHF Spot Rate = Orange Line
Aggressive SNB monetary policy (driven by weakening inflation in Switzerland) and the central bank’s intervention threat make this a strong conviction trade.