BNY Strategist Geoff Yu says the Swiss National Bank is prepared to intervene in FX markets as safe-haven flows lift the Swiss Franc, but stresses that real effective exchange rate dynamics give the SNB room to tolerate nominal strength. The bank is expected to act tactically, smoothing volatility rather than signalling a broader policy shift.

SNB weighs franc strength and volatility

"On March 2, the Swiss National Bank warned that it was “increasingly prepared to intervene” in FX markets, citing the conflict in the Middle East. The bank appeared to be anticipating rapid currency appreciation and strong safe-haven inflows that could jeopardize price stability."

"Given the franc’s close eurozone trade links, pass-through can be swift which tends to increase the SNB’s tolerance for nominal franc strength. Higher eurozone inflation will raise the euro’s real effective exchange rate (REER) relative to the franc, especially as inflation differentials remain wide, compounding over the past few years."

"This will open up greater SNB tolerance for franc appreciation. We can see that on a nominal basis, the franc is moving toward new highs, though there hasn’t been much movement in the currency’s REER over the past two years."

"We expect the SNB to adopt a more tactical approach at its meeting next week. There is also scope for some unwinding of liabilities, such as buying back bills or not rolling out repurchase agreements."

"We would not rule out any market activity if the nominal move is severe, such as several big figures within a single session. However, such activities should be viewed only in a volatility smoothing context in response to events, rather than carry much policy information for the broader cycle."

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