Switzerland's Rate Dilemma: Why Negative Interest Rates Loom and How to Play the Franc's Fall

The Swiss National Bank (SNB) stands at a crossroads. With deflation resurgent, geopolitical tensions flaring, and the Swiss franc surging to multiyear highs, the central bank faces a stark choice: cut rates to zero or even negative again—or risk deeper economic stagnation. For investors, this creates a compelling opportunity to profit from the franc's eventual retreat.

The Deflationary Threat

Switzerland's headline inflation turned negative in May 2025 (-0.1%) for the first time since 2021, driven by a 10% surge in the franc's trade-weighted index and plummeting energy prices. Core inflation has also slowed to just 0.5%, perilously close to deflationary territory. The SNB's conditional forecasts—assuming stable rates—predict average inflation of 0.3% in Q2 2025, with risks skewed to the downside. A prolonged period of low inflation risks destabilizing consumer and business sentiment, stifling growth.

The SNB's Dilemma: Rates vs. Geopolitics

The SNB's primary tool to combat deflation is interest rate cuts. Markets now price in a 69% chance of a 25-basis-point cut to 0% at its June 19 meeting, with a 31% probability of an immediate plunge to -0.25%. However, this path carries risks. A weaker franc—a byproduct of lower rates—is critical to boosting export competitiveness, but it risks drawing accusations of currency manipulation from the U.S., which imposed 31% tariffs on Swiss pharmaceuticals in April 2025.

The franc's 10% year-to-date appreciation against the euro (now trading near 0.88) has already eroded Swiss exporters' margins. Yet further rate cuts could provoke retaliation from the U.S., which labeled Switzerland a “currency manipulator” in 2020 before retracting the claim in 2021.

The Geopolitical Wildcard

The U.S.-Swiss trade dispute adds urgency. The SNB must balance deflationary pressures with the risk of escalating tariffs. If the franc weakens too sharply, it could trigger additional U.S. trade barriers, undermining the policy's intent. This creates a narrow window for action: cuts must be sufficient to weaken the franc without inviting protectionism.

Investment Strategy: Short Bonds, Play Franc-Sensitive Equities

1. Short CHF-Denominated Bonds
The SNB's shift to zero or negative rates will pressure CHF bond prices. Shorting government bonds (e.g., 10-year Swiss government bonds yielding 0.3%) offers a high-probability trade. Even a modest rate cut to 0% could send yields lower, exacerbating losses for long positions.

2. Overweight Franc-Sensitive Equities
A weaker franc disproportionately benefits Swiss exporters. Pharmaceuticals (e.g., Roche, Novartis) and luxury goods firms (e.g., Richemont) rely on global sales and will gain pricing power as the franc depreciates.

Historically, rate cuts correlate with franc declines. A return to negative rates could push EUR/CHF toward 0.95, a level not seen since 2020.

Risks to Consider

• U.S. Retaliation: If tariffs expand, even a weaker franc may not offset lost export revenue.
• Deflation Persistence: If CPI remains negative, the SNB may need deeper cuts, prolonging uncertainty.

Conclusion

The SNB's June meeting is a pivot point. With deflation and a strong franc threatening economic stability, rate cuts are inevitable. Investors should position for a weaker franc post-meeting by shorting bonds and buying equity exposure to exporters. While geopolitical risks linger, the SNB's policy shift offers a clear path to profit in this historically low-yield environment.

The franc's fall may begin sooner than markets expect—act decisively.