Swiss Franc Recovery Tests SNB Tolerance Against Euro

Key Moments

Franc Rebounds as Policy Expectations Shift

Commerzbank analyst Michael Pfister observes that EUR/CHF has retreated to its lowest point in three months, indicating that the Swiss Franc has effectively recouped its earlier losses. He attributes the prior weakness in CHF largely to differing expectations around monetary policy, noting that the market had anticipated additional rate hikes by the ECB while expectations for the SNB remained comparatively unchanged.

“EUR/CHF fell to its lowest level in three months yesterday, meaning that the Swiss franc has essentially recovered from its prolonged period of weakness. This is entirely understandable, given that this weakness was primarily due to the policy responses of the central banks. The market had priced in further interest rate rises by the ECB, while expectations regarding the SNB had barely shifted.”

Safe-Haven Appeal Backed by Strong Public Finances

Pfister points to mounting fears of a renewed sovereign debt crisis as a key factor underpinning demand for the Swiss Franc. In this environment, Switzerland’s comparatively robust fiscal position and the currency’s traditional safe-haven status are supporting CHF.

“Amidst concerns about a new sovereign debt crisis, the Swiss franc benefits not only from its safe-haven status, but also from the fact that Switzerland’s public finances are much more solid than those of most other industrialised countries. There are also concerns in Switzerland as to whether the debt brake can always be adhered to in the face of demographic change and additional military expenditure. But these concerns pale in comparison to those in other European countries.”

SNB Intervention Threat Puts a Ceiling on Franc Strength

According to Pfister, the current EUR/CHF level is again nearing the area at which the Swiss National Bank had, a few months earlier, threatened to step up foreign exchange market intervention. That prior signaling from the SNB is now seen as a factor limiting additional Franc appreciation.

“But EUR/CHF is now once again approaching levels at which the SNB threatened to intervene more aggressively in the foreign exchange market just a few months ago. It is therefore understandable that the franc itself has not appreciated any further; although such threats are less effective against a weaker euro. Those betting on lower levels must therefore hope that problems in neighbouring countries worsen further.”

EUR/CHF Dynamics at a Glance