Franc Drop Seen Short-Lived With SNB Running Out of Room to Cut

(Bloomberg) — The Swiss franc will resume its recent rally against the euro as the scope for further interest-rate cuts from the nation’s central bank is narrowing, analysts and strategists said.

The franc briefly fell to a two-week low versus the euro after the Swiss National Bank surprised markets by delivering a larger-than-expected half-point cut on Thursday, a move designed to stem the franc’s recent strength. But the currency quickly bounced and was unperturbed even after SNB President Martin Schlegel repeated his threat to bring rates to negative territory if warranted. 

The SNB has slashed interest rates rapidly this year, bringing them to just half a percentage point above zero. Yet the franc has outperformed, recently reaching the strongest level since 2015. The gains mostly reflect a weaker euro and strong demand for haven assets given rising geopolitical uncertainty —  a burden for the export-oriented Swiss economy that risks driving inflation below the central bank’s 0-2% target range.

“We’re not so sure that the current depreciation of the Swiss franc will last. The scope for further cuts is now even more limited,” said Michael Pfister, a currency strategist at Commerzbank in Frankfurt. “Moreover, there is not really a case for a stronger euro in the medium term.”

The franc fell as much as 0.7% to 0.9344 per euro after the central bank decision. The median expectation in a Bloomberg survey was for a 25 basis point cut. It traded 0.3% weaker as of 11:45 a.m. in London.

Meanwhile, the European Central Bank is expected to keep easing monetary policy at pace to support the bloc’s economy. It sets policy later on Thursday and a quarter-point cut is expected.

“We continue to view the franc as a viable safe haven currency, especially given the lack of improvement in European growth,” said Matthew Landon, global market strategist at J.P. Morgan Private Bank. “This keeps us fairly positive toward the franc relative to the euro.”

The Swiss central bank often buys and sells francs to manage the exchange rate, but it didn’t signal any changes to its currency strategy in the statement of Thursday’s decision. Policymakers just repeated they are willing to be active in the foreign-exchange market as needed.

“While the decision to cut by 50 basis points may weaken the currency in the short term, it also supports the argument that intervening in the foreign-exchange market remains a remote option, a last resort,” said Sascha Kever, chief investment officer at Pkb Private Bank SA in Lugano. 

(Adds inflation context in third paragraph.)

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