Franc Drop Seen Short-Lived With SNB Running Out of Room to Cut

The Swiss Franc's recent strength is likely to be short-lived, as the Swiss National Bank (SNB) has limited room to cut interest rates further. The SNB's policy rate is already at 0.5%, and a further cut could push it into negative territory, which may not be desirable due to potential negative effects on the banking sector. Additionally, the SNB's balance sheet normalization may lead to a reduction in foreign currency reserves, which could put downward pressure on the Swiss Franc. Therefore, investors should expect the Swiss Franc to weaken in the coming months, presenting an opportunity to buy Swiss assets at lower prices.

The Swiss Franc's recent strength can be attributed to the SNB's policy stance and interventions. The SNB has been intervening in the foreign exchange market to curb unwanted moves in the Swiss Franc, which has supported the franc's value. However, the SNB's decision to keep the policy rate unchanged in September, despite market expectations for a hike, indicates a shift in focus towards the franc's strength and its potential impact on Swiss exporters. As inflation differentials narrow and the SNB runs out of room to cut, the franc's recent drop is likely to be short-lived.



Global equity markets and risk appetite also play a role in determining the Swiss Franc's strength against other currencies. As risk appetite recovers, investors tend to shift funds from safe-haven currencies like the Swiss Franc to riskier assets, leading to a decrease in demand for CHF. This dynamic is evident in the positive correlation between the Swiss Franc and risk aversion indices, such as the VIX (CBOE Volatility Index). As risk appetite improves, the Swiss Franc tends to weaken, as seen in the recent recovery of global equity markets. However, the SNB's policy stance and interventions can counterbalance this effect, as demonstrated by the SNB's decision to drop its strong FX policy, which is expected to weaken the Swiss Franc in the short term.

In conclusion, the Swiss Franc's recent strength is likely to be short-lived, as the SNB has limited room to cut interest rates further and may reduce foreign currency reserves. The SNB's policy stance and interventions, as well as global equity markets and risk appetite, will continue to influence the Swiss Franc's value and stability. Investors should monitor these factors and be prepared to capitalize on opportunities as the Swiss Franc weakens in the coming months.