CHF: Are more rate cuts looming? – Commerzbank

The Swiss franc (CHF) has benefited significantly from the global risk-off. In EUR/CHF terms, the spot has moved significantly closer to the levels seen before the last Swiss National Bank (SNB) meeting, and in USD/CHF terms it even fallen below, Commerzbank’s FX analyst Michael Pfister notes.

A stronger franc may not come into play

“When global recession fears arise, the currencies that benefit the most are those where the central bank has the least room for manoeuvre to cut interest rates - which puts the spotlight on the Yen (where the BoJ is even considering rate hikes) and, to a lesser extent, the Swiss franc. For some market observers, however, such CHF movements are likely to ring alarm bells.”

“After all, the SNB made it clear at its last meeting that it sees such an appreciation of the franc as a risk to the stabilisation of inflation and will react accordingly. The market seems to be well aware of this risk. A further rate cut in September is now priced in at just under 90%, compared with just around 37% two weeks ago.”

“However, we would still be cautious about betting on an even stronger franc. As long as the SNB does not initiate a change of direction, a stronger franc also increases the risk that the SNB will react. At least as long as the upside risks to inflation do not return. For the time being, the SNB's main response is likely to be a rate cut. However, if it goes too far, the SNB is also likely to intervene more in the foreign exchange market.”