At 08:30 BST this morning, the Swiss National Bank surprised markets with a 50bp hike, bringing the interest rate on sight deposits to -0.25%. While the consensus was for the SNB to use today’s meeting to signal a policy change in September, last week’s hawkish ECB meeting coupled with a more hawkish Federal Reserve last night likely forced the SNB into earlier action.
With much of Switzerland’s current inflation coming through the trade channel, the Swiss National Bank is unofficially targeting a stronger inflation-adjusted CHF rate (real exchange rate) in order to reduce the level of imported inflation. Widening monetary policy differentials threatens this objective, hence warranting an earlier than expected rate hike. Today’s decision to surprise markets has had the desired effect for the SNB as EURCHF drops over 1.5%, while the Swissie also notches gains in excess of a percentage point against the dollar. In addition, markets are also pricing in expectations of a second 50bp hike from the SNB at September’s meeting, which should keep EURCHF trading at relatively low nominal levels over the coming months even with two ECB meetings scheduled ahead of the SNB’s next policy announcement on September 22nd.
A stagflationary backdrop in the eurozone and an ECB that is struggling to effectively keep yield spreads in check, as highlighted by yesterday’s emergency meeting and the absence of a tool to tackle market fragmentation, adds another dynamic to our bullish CHF call over the coming months. Coupled with a supportive Swiss interest rates and a commitment by Governor Jordan to intervene in FX markets should CHF now depreciate, our confidence in our one-month EURCHF forecast of 1.015 has increased.
Over the coming quarter, we expect EURCHF to test parity as the SNB continues to hike rates in line with market expectations as they aim for a stronger real CHF.
EURCHF has room to run lower as inflation differentials with the eurozone keeps the real effective CHF rate weak relative to recent history
Simon Harvey, Head of FX Analysis