Rabobank’s Senior FX Strategist Jane Foley argues that while the Swiss Franc meets many safe-haven criteria, its strength remains problematic for the SNB given very low inflation and a zero policy rate. Foley underlines that FX intervention is constrained by potential US Treasury scrutiny and recent US-Swiss trade tensions, even as SNB officials signal a higher readiness to intervene during the current political crisis.

SNB balances strength and intervention risks

"On paper, the CHF meets a lot of ‘safe-haven’ criteria. Liquidity is decent, Switzerland has a good budget position, a current account surplus, a credible central bank and financial system in addition to a strong rule of law. CHF strength, however, has been a frequent thorn in the side of the SNB in past decades."

"The latest Swiss CPI inflation print was a meagre 0.1% y/y (EU harmonised 0.5% y/y) and with the policy rate already at zero, the SNB has limited room for manoeuvre on interest rates. Although the SNB has maintained that a return to negative rates is plausible, clearly it is not an optimal solution. That said, FX intervention also has downsides."

"Aside from it potentially being ineffective, the other obvious risk with FX intervention is that this could trigger the wrath of the US Treasury. Last year, Switzerland underwent a very difficult series of trade negotiations with the US after reciprocal tariffs of 39% were announced by US President Trump. These were eventually cut to 15% in November, but not without cost."

"Overhanging the US/Swiss trade talks was that fact that Switzerland was on the US Treasury’s Monitoring list of currency policies and practices. This position was renewed earlier this year. That said, in September last year the US Treasury and Swiss authorities did announce a joint statement confirming that neither country target the exchange rate for competitive purposes and recognising that “foreign exchange market interventions are an important monetary policy instrument for the SNB in ensuring appropriate monetary conditions and meeting its statutory mandate with respect to price stability.”

"The September statement added weight to the comments from SNB Vice-President Martin on March 4 that “our willingness to intervene, our readiness to intervene, is higher given the recent political event”. This followed a similar statement to media outlets on March 2."

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