The Swiss franc (CHF) has been the strongest G10 currency over the last five days. But CHF's strength over the last 24 hours has been helped by comments from SNB president Thomas Jordan. Given the SNB's focus on a stable real exchange rate, low inflation in Switzerland points to EUR/CHF trading 4% cheaper next year, economists at ING report.
Sea change in Swiss National Bank’s FX attitude
“Central Bank Governor Jordan was quoted saying: ‘The SNB is ready to act if inflation risks materialise’. After all, the SNB has accumulated CHF500bn of FX reserves in fighting CHF strength over the last decade, so surely it would prefer a stronger EUR/CHF? Apparently not. In an important speech made on 29 April, Jordan made the revelatory point that a weaker real Swiss franc exchange rate would be inappropriate given the inflation threat in Switzerland.”
“The SNB wants at least a stable real exchange rate. Given that inflation in Switzerland is running around 4% lower than its main trading partner, the eurozone, one could roughly argue that EUR/CHF needs to be 4% lower in nominal terms over the next year to keep the real CHF stable. That would point to EUR/CHF trading under parity this time next year.”
“The prospect of the SNB outright selling EUR/CHF does seem fanciful right now. But the policy choice of a stronger nominal CHF from the SNB is starting to make the case that EUR/CHF will struggle to sustain any moves above 1.05 over the next 12 months and that our baseline EUR/CHF forecast profile must now be revised lower.”
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