Swiss rate-cut curve ball cannot be ignored
LONDON: A handful of banks expect Switzerland’s policymakers will go against forecasts and cut interest rates in their first decision of the year.
Economists at Barclays Plc, Citigroup Inc, Julius Baer & Co Ltd, and others are among the few predicting the Swiss National Bank (SNB) will deliver a reduction aimed at safeguarding the economy from potential currency strength.
A surprise move, should it happen later yesterday, would come three months earlier than the majority envision.
While easing is seen as an outside possibility – and would be the first such step by a Group of 10 central bank this cycle – there’s strong Swiss precedent for trailblazing on rates. Less than two years ago, the nation’s policy-makers began hiking rates ahead of the European Central Bank (ECB).
If I’m going to try and go long this week against one currency, it’s going to be the Swiss franc, Samuel Zief, head of global foreign exchange strategy at JPMorgan Private Bank, told Bloomberg Television earlier this week. The SNB always likes to throw curveballs, he said.
The logic behind a cut lies in the SNB’s once-in-a-quarter rate-decision schedule.
Other central banks that meet more frequently have plenty of time to lower rates sooner, potentially leaving the Swiss with comparatively elevated borrowing costs, putting pressure on the franc to appreciate.
On Wednesday, the franc sank to 0.96.70 per euro, its lowest in four months.
Even though the franc is down around 4% versus the euro this year, it’s still 7% stronger than in June 2022, just before the SNB began raising rates and supporting the currency to shield Switzerland from imported inflation.
Maxime Botteron, an economist with UBS Group AG in Zurich, predicts a first reduction in June, but highlights the fact that consumer-price growth has slowed to 1.2% in February compared with the central bank’s prediction of the rate averaging 1.8% over the first quarter.
The probability of a rate cut this week is not zero, Botteron said. Price pressures have eased significantly.
Swaps markets are pricing a 39% possibility of loosening yesterday, edging higher from earlier in the week.
According to JPMorgan Private Bank’s Zief, a rate move would push the franc around 1% lower toward 0.90 per dollar and 0.97 per euro, a level last tested in November.
A clutch of market metrics indicate pressure on the currency mounting.
The latest Commodity Futures Trading Commission positioning data show leveraged funds, which include hedge funds, boosted their bets for a weaker franc to their biggest in a year last week.
Options pricing suggests some investors have positioned for a SNB cut, with one-week risk reversals hitting the most bearish levels on the franc versus the euro in more than two years.
At the same time, the cost to hedge against swings in the franc versus the dollar ahead of the SNB decision has hit a one-year high.
The franc also remains a favourite currency to sell against the yen this year, as investors bet on rates going higher in Japan.
