MUFG economists highlight that the Swiss Franc (CHF) has underperformed as the Swiss National Bank (SNB) leans against currency strength and downplays current inflation. However, they caution that a prolonged closure of the Strait of Hormuz and sustained energy shock could force a more hawkish shift, with markets already pricing a higher probability of an SNB hike by year-end.

SNB stance may shift with energy shock

"As in Sweden, inflation in Switzerland was running well below the SNB’s target before the energy price shock took hold. Initially, the SNB’s policy focus has been on the downside risks to inflation stemming from a stronger CHF, driven by safe-haven demand following the Middle East conflict. As a result, the SNB has continued to signal a much greater willingness to intervene in the FX market to weaken the currency."

"This timely and forceful pushback has contributed to the CHF’s underperformance since the conflict began. SNB Governor Martin Schlegel has also attempted to downplay the rise in headline inflation to 0.6% in April, up from 0.3% in March, stating that there has been “hardly any change” in medium-term price pressures. This view is, for now, supported by core inflation, which slowed to an annual rate of 0.3% in April."

"However, if the Strait of Hormuz remains closed for an extended period and leads to a more prolonged energy price shock, the SNB’s relatively dovish policy stance is likely to shift. This could open the door to rate hikes and a greater tolerance for a stronger CHF to contain upside inflation risks. Indeed, the Swiss rates market has already begun to price in a higher probability of an SNB rate hike by the end of this year."

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