Swiss Franc’s bearish view gets more legs Swiss Franc’s bearish view gets more legs Swiss Franc’s bearish view gets more legs

Swiss Franc’s bearish view gets more legs

Forex 6 minutes to read
Charu Chanana

Head of FX Strategy

Summary:  The faster-than-expected cooling in Switzerland’s CPI in January could provide comfort to SNB on inflation returning to target. Market is starting to look for competitive pivots, and expectations around SNB rate cuts coming before ECB and Fed could continue to gain traction. A strong franc could also be a worry for the economy, and a more evident shift in SNB’s FX stance can bring further franc downside.


Swiss CPI is cooling faster-than-expected

Switzerland’s inflation readings surprised on the downside for January, a clear divergence to US CPI that came in hotter-than-expected yesterday. CPI accelerated by 1.3% YoY in January vs. expected and previous print of 1.7%. On a MoM basis, inflation was 0.2%, coming in well below the 0.6% expected. Core inflation, meanwhile, slid to 1.2% YoY in January, the lowest level since January 2022.

That is a major win for Swiss National Bank (SNB) that kept rates unchanged at 1.75% at its last meeting in December, and was expected not to pivot before other major central banks. But the narrative has shifted considerably, and market is increasing the odds of an SNB rate cut now as early as March.

Comments from SNB President Jordan earlier this week hinted at the negative effects of nominal appreciation of the franc on the economy. He sounded confident that inflation could stay within target range of 0-2% despite any acceleration risks.

SNB could be looking to sell franc

Elevated inflation in 2022 made the SNB’s FX bias shift towards a clear strengthening of the franc to ward off imported inflation. The battle on inflation appears to be over now, and given the economic growth risks taking over concerns, the FX bias could likely shift towards weakening the franc.

This is also evident in how the SNB has been active in the FX markets. The central bank has been running down its reserves until November, but has reversed course from December. The FX language has also shifted from “focus is on selling foreign currency” to “SNB is willing to be active in foreign exchange market as necessary” in December, implying a subtle shift in its FX stance.

Mixed positioning for the franc

While overall positioning in the franc remains short, leveraged funds have mostly covered their shorts and most of the aggregate short positioning remains with asset managers. Most recent CFTC data for the week of February 6 saw leveraged funds turning back to a short position in the franc in an abrupt change from a net long position in the week before as they potentially positioned for a weaker CPI and a consequent shift in central bank tone. CFTC data show leveraged funds held 1,537 contracts tied to bets the franc will fall, the most since mid-December. That’s down from 2,433 long bets the week prior, which was the highest level since early November.

Until the SNB adopts a clear FX signal, positioning could remain volatile. But short positioning is far from stretched for now, and pre-2020 levels of short positioning could mean significant franc downside from here.

Source: Bloomberg

Franc offers minimal negative carry to position for BOJ pivot

The competitive pivot narrative will likely be back to the forefront with a hot January US CPI prompting a pushback to Fed rate cut expectations, as discussed in this article. If Swiss inflation remains below 2%, there is an increasing chance for the SNB to cut rates in March and pre-empt the ECB and the Fed. Back in June 2022, the SNB hiked 50bps, a month ahead of ECB’s first rate hike. EURCHF has rallied to 0.95, but is still below its 200DMA currently seen at 0.9580, which would also be a key test to break above from the downward channel that has been in place for most of 2023.

Source: Bloomberg, Saxo

Given broad dollar strength so far in 2024, it is no surprise that USDCHF is already up close to 5.5%. However, pair was down 9% in 2023 so there is more room for franc weakness as pivot bets are brought forward for SNB but delayed for the Fed.

Finally, its important to consider that SNB interest rates at 1.75% are the lowest in G-10, barring the negative interest rate offered by Bank of Japan. A rate cut from the SNB would make franc as an even more popular funding choice for carry trades, especially in light of the expectations around BOJ tightening. Additionally, for those looking to position for removal of negative interest rates from the BOJ and the consequent appreciation of the yen, Swiss franc offers the least negative carry. However, any deterioration in geopolitics and a resultant risk-off move could still bring tactical strength back to franc.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.