Swiss Franc steady, SNB meeting on the horizon
- The Swiss Franc trades little changed ahead of the Swiss National Bank meeting on Thursday.
- Markets are pricing in a 29% probability of the SNB cutting interest rates.
- The technical picture shows a box range forming on the 4-hour chart.
The Swiss Franc (CHF) edges slightly higher at the start of the week, up a few hundredths of a percent in its most heavily traded pairs.
Swiss Franc traders are awaiting the big event of the week, the Swiss National Bank (SNB) March policy meeting on Thursday.
The probability of the SNB trimming its 1.75% policy at the meeting lies at 29%, according to Reuters. If it were to cut rates the Swiss Franc would weaken, as lower interest rates attract less foreign capital inflows.
Swiss Franc vulnerable due to lower inflation
The latest inflation data from Switzerland showed a fall in the Consumer Price Index (CPI) in February to 1.2% YoY from 1.3% in the previous month, according to the Federal Statistical Office.
Overall this is lower than the SNB expected back at its December meeting, when it said inflation, which was then at 1.4%, was likely to “increase somewhat in the coming months due to higher electricity prices and rents, as well as the rise in VAT.”
The SNB estimates inflation to average 1.9% in 2024. However, the rate of inflation is currently considerably below that figure at 1.2% – though on a monthly basis the CPI did rise 0.6% in February from 0.2% previously.
Inflation is also well below the SNB’s first-quarter forecast of 1.8%.
"Consumer price inflation is running 0.6 ppts below the bank's 1.8% first-quarter forecast, while core inflation of 1.1% is the lowest since January 2022," Reuters reports.
The Zurich-based institution will also publish a new set of medium-term inflation forecasts on Thursday, which could impact the outlook for monetary policy and CHF. If it revises down its inflation forecasts substantially, it would be negative for the Swissie, since it would suggest a higher probability of the SNB cutting interest rates on the horizon.
Often the SNB mimics the European Central Bank (ECB). However, inflation is falling faster in Switzerland than in the Eurozone, indicating a possibility it could move to cut rates before its European cousin.
Swiss Franc too expensive, says Jordan
The Swiss Franc is now too expensive for Swiss businesses after appreciating in real terms, said the Chairman of the Swiss National Bank, Thomas Jordan, in an interview with Bloomberg in February.
The SNB is known to directly intervene in foreign exchange markets to manage the value of the Swiss Franc. According to data on Switzerland's Foreign Exchange Reserves (CHFER), there has been a recovery in Swiss Forex reserves (of other currencies) in 2024, indicating that the SNB could be selling Swiss Francs to bring the exchange rate down.
Technical Analysis: Swiss Franc against USD forming a box range
The USD/CHF, which measures the buying power of a single US Dollar in Swiss Francs, has been oscillating within a relatively tight range between roughly 0.8900 and 0.8740 since the middle of February.
US Dollar versus Swiss Franc: 4-hour chart
The pair is overall in short-term uptrend with the expectation that it will eventually break out and start moving higher. However, resistance from a long-term trendline and the 50-week Simple Moving Average (SMA) present considerable obstacles.
For more upside to be confirmed, a decisive break above the range highs at 0.8900 would be required. Such a move would probably then extend to an initial target at 0.8992, the 0.618 Fibonacci (Fib) ratio of the height of the range extrapolated higher, followed by 0.9052, the full height extrapolated higher.
A decisive break below the range low at 0.8729, however, could indicate a short-term trend reversal and the start of a deeper slide lower. The first target for the move lower would be the 0.618 Fib extrapolation of the height of the range at 0.8632, followed by the full extrapolation at 0.8577, which is also close to the 0.8551 January 31 lows, another key support level to the downside.
Swiss Franc FAQs
The Swiss Franc (CHF) is Switzerland’s official currency. It is among the top ten most traded currencies globally, reaching volumes that well exceed the size of the Swiss economy. Its value is determined by the broad market sentiment, the country’s economic health or action taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was abruptly removed, resulting in a more than 20% increase in the Franc’s value, causing a turmoil in markets. Even though the peg isn’t in force anymore, CHF fortunes tend to be highly correlated with the Euro ones due to the high dependency of the Swiss economy on the neighboring Eurozone.
The Swiss Franc (CHF) is considered a safe-haven asset, or a currency that investors tend to buy in times of market stress. This is due to the perceived status of Switzerland in the world: a stable economy, a strong export sector, big central bank reserves or a longstanding political stance towards neutrality in global conflicts make the country’s currency a good choice for investors fleeing from risks. Turbulent times are likely to strengthen CHF value against other currencies that are seen as more risky to invest in.
The Swiss National Bank (SNB) meets four times a year – once every quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.
Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can impact the Swiss Franc’s (CHF) valuation. The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or the central bank’s currency reserves have the potential to trigger moves in CHF. Generally, high economic growth, low unemployment and high confidence are good for CHF. Conversely, if economic data points to weakening momentum, CHF is likely to depreciate.
As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the Eurozone is essential for Switzerland and, thus, for the Swiss Franc (CHF). With such dependency, some models suggest that the correlation between the fortunes of the Euro (EUR) and the CHF is more than 90%, or close to perfect.