The Swiss National Bank surprised markets with signals of potential currency interventions and a possible return to negative interest rates. However, the acceleration of inflation in Switzerland has turned everything upside down. Like the referendum, it supports the franc. Let’s analyze the situation and make a trading plan for the USD/CHF and EUR/CHF.
The article covers the following subjects:
Major Takeaways
- Inflation in Switzerland accelerated in April.
- The futures market is pricing in a rate hike by the SNB.
- The referendum is boosting demand for the franc.
- Short trades on the USD/CHF pair can be considered on a breakout of 0.777.
Weekly Fundamental Forecast for Franc
One might think that Japan’s massive currency interventions should have made investors stay away from the currencies of countries that intervene in the Forex market. However, the franc is rapidly strengthening against the US dollar, the euro, and other currencies, despite SNB Governor Martin Schlegel saying at the end of April that the central bank had been buying and would continue to buy foreign currency if necessary.
In fact, the situations in Japan and Switzerland differ significantly. Tokyo is doing everything possible to support the yen in order to curb inflation and avoid forcing the Bank of Japan to raise interest rates. Bern, on the other hand, is concerned about the franc’s appreciation, as it could bring back the prospect of negative interest rates. Such a policy carries numerous side effects and is viewed by the Swiss National Bank as a measure of last resort.
Swiss Inflation Change
Source: Bloomberg.
Against this backdrop, the acceleration of consumer prices in Switzerland in April — from 0.3% to 0.6% year-on-year — has effectively supported USD/CHF and EUR/CHF bears. The latest reading exceeds the Swiss National Bank’s inflation forecast of 0.5% for the end of the quarter. At the same time, elevated energy prices increase the risk that this estimate may be exceeded.
In such conditions, a return to negative interest rates is not required. Bloomberg analysts predict that rates will remain at zero until the end of 2026. The futures market expects a single monetary tightening move of 25 basis points.
The SNB may want to take action as it watches the franc strengthen. However, Martin Schlegel has stated that any currency interventions are conducted solely for monetary policy purposes. That policy does not require devaluation.
The franc is taking advantage of its safe-haven status not only because of the uncertainty in the Middle East. Switzerland’s right-wing parties have initiated a referendum to cap the country’s population at 10 million. Polls indicate that support for the cap rose from 45% to 52% in April.
Share of Swiss Citizens and Residents without Swiss Passport
Source: Bloomberg.
The current population stands at 9.1 million. Over the past decade, this figure has grown by 10%, significantly outpacing the 2% increase recorded across the European Union. This growth is primarily driven by immigration.
In theory, restricting immigration could weigh on economic growth. However, in practice, such measures may set a precedent, encouraging other countries to introduce similar limits on foreign nationals. This is seen as an increase in political risk in Europe and supports demand for the Swiss franc as a safe-haven currency.
Weekly Trading Plan for USDCHF and EURCHF
Short positions on the EUR/CHF pair opened at 0.922 can be kept open and increased if prices fall below 0.914. As for the USD/CHF pair, if it slides below the support level of 0.777, short positions can be considered.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDCHF in real time mode
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