MUFG’s Derek Halpenny says the Swiss Franc underperformed after the SNB left rates at zero, but only minor inflation forecast revisions underline expectations of persistently low Swiss inflation. The SNB reiterated its readiness to intervene against excessive strength, while MUFG sees limited upside for global yields and expects Fed, ECB and BoE rate cuts next year, constraining further CHF weakness.

SNB stance and yield-driven franc moves

"The focus has been very much on the Fed meeting on Wednesday and the BoE meeting yesterday, but the SNB also met yesterday and as expected left the key policy rate unchanged at zero percent. The franc underperformed much of G10 and was the third worst performing with only NOK and SEK performing worse. There was certainly no sense of urgency communicated by the SNB in relation to having to respond to any upside inflation risks."

"The very limited adjustments to forecasts underlines the prospects of continued low inflation in Switzerland, which has been a source of demand for the franc given the lower risk of an inflation induced decline in real yields that is a much higher risk in the euro-zone, the UK and the US. The SNB also reiterated that “if necessary” it would be willing to intervene to ensure excessive currency strength is avoided that would undermine achieving the SNB’s price stability goal. President Schlegel was keen to play down the idea that the inclusion of the words “if necessary” implied there was less willingness to intervene to sell the franc."

"However, the adjustments to the inflation projections, even though minor, does reduce somewhat the appetite of the SNB to revert to negative rates if required. The rise in yields globally since the conflict began has had an impact on weakening the franc. Since the start of the conflict the franc is the second worst performing G10 currency although some of that move also reflects the easing of geopolitical risks and the fact that the inflation shock stemming from the Middle East conflict is turning out to be smaller than initially feared."

"However, we suspect the upside scope for global yields from here is relatively limited. We do not expect the Fed to hike rates this year and yesterday changed our call for the BoE to the policy rate remaining unchanged this year (from +50bps) while the ECB at most will raise rates just once further. Front-end yields therefore look overdone relative to the monetary action that will likely be delivered."

"Next year we expect the Fed, ECB and BoE to cut rates which suggests to us that the window for higher global yields to weaken the franc from here is relatively narrow."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)