Traders Bet on Swiss Rate Cuts by March as Other Wagers Fade

(Bloomberg) — Traders are piling into bets the Swiss National Bank will cut interest rates as early as next month, even as the market scales back wagers on easing across the developed world.

The odds of a 25 basis-point cut at the central bank’s next quarterly meeting have doubled since Friday to more than 50%. The latest jump in pricing comes on the back of a surprisingly weak Swiss inflation reading for January, which knocked the Swiss franc to a two-month low against the euro and its weakest versus the dollar since November. 

Read More: Swiss Inflation Slows, Opening Door for Earlier SNB Cuts

“Domestic inflation is set to fall considerably below the SNB’s forecasts come March,” said Simon Harvey, head of FX analysis at Monex Europe. “With the euro zone economy also looking weak, we expect the SNB to cut rates as it pre-empts the European Central Bank’s actions in the second quarter and aims to buffer against imported deflation.” 

A cut by the SNB in March would front-run easing by other G-10 central banks, which have been warning markets that they need to confirm that price pressures have been stamped out before they start their easing cycles. Traders see the possibility that the Federal Reserve and the ECB may both wait until June to deliver their first cuts.

The SNB in December signaled an end to its tightening campaign, pointing to consumer prices which are now running below its 2% ceiling.

Hedge Funds 

The growing possibility of an early cut prompted hedge funds to sell the franc last week, while mounting signs of easing inflation are also driving speculation of franc sales by the SNB to fend off the risk of imported deflation. Data released last week suggests that the central bank may have been selling francs, after announcing in December it would no longer only focus on currency purchases. 

The SNB has so far forecast inflation to average 1.8% in the first quarter and to approach the 2% ceiling of its target range over the summer. The central bank has not penciled in a retreat of price pressures until the fourth quarter. 

With the January reading coming in significantly below expectations, the SNB may consider cutting its inflation forecast next month, which would be the second downward revision in a row.

Economists noted that the reading could point to inflation being lower on the year than the central bank has expected so far. The softer data “makes up more room for the SNB to consider an easing of monetary policy already at its March meeting,” EFG Bank Senior Economist GianLuigi Mandruzzato said.

Inflation Outlook 

UBS lowered its estimate for 2024 inflation to 1.4%, a half point below the SNB’s last forecast, citing weaker-than-expected second-round effects. Still, it maintained the base scenario of the SNB only starting to cut in June.

“A March cut would be possible if the franc appreciates significantly in the coming weeks,” economists Alessandro Bee, Florian Germanier and Maxime Botteron said in a note to investors.

The franc fell as low as 0.9497 to the euro on Tuesday. Harvey at Monex said that the SNB “will likely intervene” to sell the franc if the euro falls back below 0.9450 and stays there ahead of its March 21 rate announcement.

Pricing in the options market suggests that traders are positioning for the risk that volatility in the franc could pick up in the coming weeks. Two-month implied volatility in euro-francs, which captures the March 21 meeting, rose after the inflation data, bouncing off a two-month low. Despite the move, options remain underpriced by nearly most since May.  

“Market pricing currently underestimates the risk of SNB action in March,” said Sebastian Petric, head of FX research at LGT Bank Schweiz AG in Zurich.

–With assistance from Bastian Benrath.

(Adds analyst comment on inflation outlook, SNB; updates prices)

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