Swiss Franc Forecast: Why CHF May Be At Risk Despite Wobbly Stocks, Eyes On SNB

10 and 20 us dollar bill

SWISS FRANC FUNDAMENTAL FORECAST: BEARISH

  • Swiss Franc has been underperforming despite stock market volatility
  • Prospects of dovish SNB policy in the long run leaves CHF vulnerable
  • Still, risk aversion may trim the Franc’s downward trajectory near-term

The Swiss Franc has been struggling to capitalize on recent jitters in global stock markets and it may continue to underperform ahead. CHF tends to do well when market volatility is on the rise and vice versa thanks to its anti-risk attributes, particularly when comparing it against other currencies in Europe. So despite some wobbliness in stocks as of late, especially in the tech sector, what might explain its underwhelming performance?

Before diving into that, the Swiss National Bank (SNB) may actually welcome further declines in CHF, particularly with the next monetary policy announcement coming up on March 25th. Switzerland’s export-oriented economy means that a strong local currency can bring with it deflationary forces. The SNB has been struggling to bring up CPI to its 2% price target for years, intervening in forex markets to keep deflation at bay.

As the coronavirus ravaged global financial markets last year, the central bank had to aggressively step up efforts to prevent its anti-risk currency from appreciating too rapidly. It ramped up total sight deposits, a proxy of foreign exchange reserves, to help cool strength in the CHF – see chart below. But since then, the SNB has been letting off the gas pedal, especially given the currency’s recent depreciation.

Check out the DailyFX Economic Calendar for incoming Switzerland data

SWISS NATIONAL BANK TOTAL SIGHT DEPOSITS

Swiss Franc Forecast: Why CHF May be at Risk Despite Wobbly Stocks, Eyes on SNB

Now the rollout of the coronavirus vaccine around the world and massive fiscal stimulus from the United States are bringing with them prospects of reflation. This can be seen by taking a look at longer-term Treasury rates, with the 10-year up almost 240% from August’s bottom. Rising government bond yields have also been seen in Switzerland, though the entire yield curve (from the front-end to the 50-year rate) still remains negative.

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