Swiss Franc Outlook Weakens as SNB Left as Europe's Major Dove

  • UBS sees no reason to hold franc as SNB behind the curve
  • Nomura says currency may weaken to 1.12 per euro in near term

The franc’s decline to a one-year low suggests the Swiss National Bank may only need to stand still to achieve its aim of a weaker currency.

Major central banks across Europe are hinting at unwinding monetary policy stimulus, leaving the SNB among a shrinking dovish camp. UBS Group AG and Nomura Holdings Inc. predict further downside for the Swiss currency, after it broke through a key technical level at 1.10 per euro on Monday and dropped to its lowest since June 2016.

“If the rest of the world is offering higher rates and the Swiss National Bank stays behind the curve, then intuitively you want to diversify to those assets and away from zero-yielding or negative-yielding Swiss francs,” said Lefteris Farmakis, an analyst at UBS, in emailed comments. Now that there are no longer severe political risks in the euro zone, there are no reasons to hold Swiss francs, with UBS targeting 1.13 for the end of the year, he added.

That may be a relief for SNB’s President Thomas Jordan, who said last month the franc remains overvalued and saw no change in the stance of the bank, which has been using negative rates plus foreign-currency purchases for over two years to limit its appeal. Options bets signaled expectations for a fall, with the premium for one-week calls on the euro against the franc relative to puts at the highest since February 2016 on a closing basis.

The Swiss franc fell 0.1 percent to 1.1015 per euro by 7:30 a.m. in London on Tuesday, its fourth day of losses. The break of the 1.10 threshold was mostly a technical reaction stemming from the derivative market, as “tons of options” have been written with a strike price around that level, said Arnaud Masset, a market analyst at Swissquote Bank SA.

On technical charts, the pair is testing the 78.6 percent of the Fibonacci retracement of its drop in June 2016 at 1.1003. However, gains for the euro may not be straightforward as the pair moves within a very tight range among Group-of-10 peers.

Below are more analysts’ views on the Swiss franc:

Nomura Holdings Inc.

  • “Monetary policy divergence is putting downside pressures on the Swiss franc against other European currencies,” said Yujiro Goto, senior currency strategist, in emailed comments
  • “G10 European central banks are turning less dovish, as the European central bank, Riksbank, and Norges Bank all removed their rate cut bias recently. The Bank of England also shows its tolerance to higher inflation is now much lower. The exception is the Swiss National Bank”  
  • The pair has hit Nomura’s year-end target of 1.10. “In the near term, overshooting toward 1.11-1.12 is likely,” Goto added. The bank has a forecast of 1.12 by end-2018

Credit Suisse Group AG

  • The move lower in the currency is “a combination of ECB taper talks and reduced political and financial risks in the euro zone after the French elections and the Italian bank resolution,” said Oliver Adler, chief economist for Switzerland, in emailed comments
  • Data released by the Swiss National Bank showed no intervention in the currency market, in a sign that “the safe haven inflows into the Swiss franc have abated”
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