CHF: SNB cut paves the way for more CHF weakness

The Swiss franc was dealt a blow yesterday as the Swiss National Bank unexpectedly cut rates by 25bp. Markets were pricing in around one in three probabilities of a cut yesterday, and the decision led to a broader repricing in the CHF curve. A back-to-back 25bp cut in June is almost fully priced in (21bp), and markets are expecting another one by year-end. Our economist thinks cuts in June and September now look likely. That would take the policy rate in Switzerland back to 1.0%, with another move potentially lowering it to 0.75%.

The EUR-CHF rate gap – a key driver of EUR/CHF – is set to prove supportive for the pair beyond the short term. We suspect markets are wrong in pricing in more than 75bp of easing by the ECB this year, while the SNB rate expectations can face further dovish repricing.

Crucially, the SNB’s policy statement made two references to the strength of the franc in real terms, meaning the FX intervention tool can now be used to weaken the currency. Things may quiet down in EUR/CHF now, especially as markets may have an inclination to price in more cuts by the ECB, but selling the rally in the pair remains risky, and a gradual climb towards parity is a more likely outlook.