SNB Pushback Against Franc Strength
The Swiss National Bank (SNB) has signalled that it will resist sharp CHF gains. On 2 March it said its willingness to intervene in foreign exchange markets had increased to counter “a rapid and excessive appreciation”. The SNB repeated this position at its latest policy meeting last week. It said intervention would aim to avoid an appreciation that could threaten price stability in Switzerland. Swiss inflation was low before the conflict, which can increase sensitivity to currency strength. Inflation was 0.1% in February, compared with 2.2% in February 2022 before the Ukraine conflict. The CHF’s recent weakness may not last if the energy-price shock worsens. A more disruptive global outcome could lead to a reversal in the CHF move.Trading Implications And Risk Scenarios
The Swiss Franc has not behaved as a typical safe-haven currency since the Middle East conflict began in late February. Instead of strengthening, it has weakened by about 3.0% against the US Dollar, pushing the USD/CHF pair up towards the key resistance level of 0.7950. This unusual price action is a direct result of the Swiss National Bank’s (SNB) very public commitment to fight any rapid appreciation. We see the SNB’s stance as a response to uniquely low domestic inflation, which was just 0.1% before the conflict started. The latest figures released by the Swiss Federal Statistical Office on March 5th showed consumer prices are still only up 0.2% year-over-year, giving the central bank a strong incentive to prevent a stronger franc from importing deflation. This contrasts sharply with the situation in early 2022, when inflation was already at 2.2% before that year’s energy shock, giving the SNB room to welcome a stronger currency. Looking back at the period following the conflict in Ukraine in 2022, the franc acted as a classic haven, with the EUR/CHF pair notably breaking below parity for the first time in years. The current environment is different because the SNB is actively working against this instinct, creating a tug-of-war for the currency. This tension is evident in the derivatives market, where one-month implied volatility for USD/CHF has climbed from around 5.5% to over 7.0% in the past three weeks. For the coming weeks, this creates opportunities for traders who believe the SNB will succeed in capping the franc’s strength. Selling out-of-the-money CHF calls or implementing bearish call spreads on the franc could be a viable strategy to collect premium. This view bets that the central bank’s intervention threats will keep a ceiling on any appreciation, especially as USD/CHF tests its 200-day moving average. However, we remain cautious about assuming this franc weakness will last if the global situation deteriorates. Brent crude prices have already surged by 12% to over $92 per barrel since late February, signaling that the energy shock is a credible threat. Traders who anticipate a wider global economic slowdown could consider longer-dated options, such as buying puts on USD/CHF, to position for an eventual flight to safety that could overwhelm the SNB’s efforts. Create your live VT Markets account and start trading now.
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