Martin Schlegel, Chairman of the Swiss National Bank (SNB), voiced concerns about uncertainty in inflation impacting how foreign currencies are managed. The SNB primarily uses the policy rate, but it can intervene in foreign exchange markets if necessary to maintain price stability. Predictions for Switzerland’s economic growth in 2025 are lower than expected. Currently, there is a lot of uncertainty, making the Swiss franc a safe haven, even though the inflation outlook is unclear. Domestic services are currently driving inflation, while external influences are contributing negatively. The Swiss franc is appealing to both local and foreign buyers, but uncertainty is limiting growth prospects.

Gold And Interest Rates

Having large amounts of gold on the balance sheet is not seen as beneficial. The SNB may consider negative interest rates again if there are no alternatives to US Treasuries, even though they were effective in the past. Switzerland insists it does not manipulate its currency, intervening only to avoid an overvalued franc. The aim is to meet its mandate without seeking a competitive edge. Schlegel’s recent comments have brought monetary policy to the forefront, especially concerning currency exposure amid ongoing price uncertainty. With inflation being unpredictable, monetary officials continue to rely on policy rates as the main tool. Interventions in foreign exchange markets are a backup plan and will be considered only if price targets are threatened by erratic currency changes. Economic forecasts for next year are cautious. Output is expected to be lower than anticipated, reflecting the uncertainty that investors are already sensing. When economic conditions become less certain, there’s often a flight to safety—here, the Swiss franc. Even with domestic inflation mainly driven by the services sector rather than rising import costs, risk aversion pushes more money into the currency, especially when inflation abroad remains low or declining. The dual appeal of the franc—trust from locals and demand from abroad—helps stabilize it during stressful times. However, this strength brings challenges. The real concern is balancing currency appreciation with export competitiveness. This tension isn’t new but has become more pronounced as long-term growth forecasts are subdued. The question is whether the franc can maintain its role as a safe haven without hurting broader economic growth.

Reserves And Exchange Rate Moves

Regarding reserves, gold has not regained its status as a primary store of value for the central bank. US Treasuries still dominate, even as yields fluctuate and political risks complicate matters. If conditions change, reserve strategies may adapt, but there is currently little interest in holding a lot of gold. Importantly, there is no clear way to reduce dependency on negative rates in extreme situations, even though past use has achieved policy goals. This doesn’t imply a sudden return to negative rates, but the possibilities remain open. The position on exchange rate movements is clear. Currency values can adjust, but if the franc appreciates too much, it could jeopardize price targets. Any market actions are not intended to boost exports or undervalue goods; instead, they are defensive, focused on keeping monetary policy on track. This approach helps maintain credibility, even amidst rising volatility. For those managing exposure based on rates and currency fluctuations, the main message is clear. Keep an eye on policy directions in Switzerland and emerging indicators from other major economies. Adjust hedging strategies based on potential changes in funding costs. Since safe-haven assets behave differently during sudden sentiment shifts, monitoring rates volatility and implied volatility in currency options can provide better insights than broad indexes alone. Changes typically surface there first and highlight the balance between capital seeking safety and central banks fulfilling their mandates. Instruments further out on the curve may come under pressure if confidence in growth continues to wane. Pay close attention to adjustments in forward rate agreements linked to Swiss franc benchmarks. High cash demand, particularly during quarter-end transitions, could lead to re-pricing of short-term tenors if deposit conditions worsen. Portfolio strategies should adopt flexible approaches, being light enough for quick adjustments, but grounded in a framework that allows signals from central banks to influence trading decisions. Create your live VT Markets account and start trading now.

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