CHF: Are negative interest rates coming back? - Commerzbank

One of the most exciting G10 currencies at the moment is probably the Swiss Franc (CHF). This should not come as a complete surprise, because even though EUR/CHF has risen by one Rappen in recent days, the Swiss franc remains the clear winner of the last three weeks since 'Liberation Day' - after all, the franc has appreciated by more than 7% against the US dollar this month. Against the G10 average, it is still up close to 4%, Commerzbank's FX analyst Michael Pfister notes.

SNB's FX intervention dilemma persists

"The problem is that, despite its willingness to do so, it hardly intervened at all last year. In total, it bought just around 1 billion CHF in foreign currencies last year, compared with more than 20 billion CHF in foreign currency sales in the last quarter of 2023 alone. The SNB probably wants to avoid inflating its balance sheet too much. Foreign exchange reserves also carry risks, and given the current market volatility, I can understand any SNB trader who does not want to have more bonds on the balance sheet than necessary. Moreover, the SNB would run the risk of attracting too much attention from Donald Trump if it intervened more. Not a very desirable scenario."

"It could cut its key rate further. But even here there is a problem: at 0.25%, the SNB has already used most of its ammunition for rate cuts. Of course, it could repeat the negative interest rate experiment (and the market is now pricing in negative rates again), but that is probably not a particularly desirable scenario for the SNB. Especially not if a global recession really does set in and it runs out of room to cut interest rates further. After all, the effective lower bound is likely to be around -0.75%, and other central banks, such as the ECB, are a long way from there. In the event of a global recession, the ECB is likely to cut rates more sharply - and the Swiss franc will appreciate accordingly against the euro."

"Given these bad options, the SNB is probably very happy that the franc has not appreciated further. But the fundamental problem remains. We pointed out several times last year that the SNB was in a dilemma. Since then, it has used up most of its ammunition for rate cuts, while Trump has provided another argument against more interventions. This does not necessarily mean that the SNB will not respond with negative rates or more interventions. If the appreciation accelerates, the SNB is likely to react. However, in our view, the risks are clearly pointing to a stronger Swiss franc at the moment."