Nomura expects the Swiss National Bank to keep its policy rate at 0.00% at the 18 June meeting, with inflation dynamics still offering limited impetus for tightening. Inflation has accelerated on higher energy prices, but core inflation remains low, while activity indicators are mixed and uncertainty linked to the Iran war persists.
The focus is likely to remain on foreign-exchange policy. Since the last meeting, SNB officials have referred to an increased willingness to intervene in FX markets, including comments from Chairman Schlegel on 3 June and Vice Chairman Antoine Martin on 21 May, according to Bloomberg. Although CHF has depreciated against EUR since March, the SNB is due to publish data on FX interventions for Q1 at the end of the month, and the forecast is that it will show increased action against franc strength during the quarter; the expectation is for this stance to continue alongside an unchanged 0.00% rate for the foreseeable future.
Stable Policy Rate Driven By Low Inflation And Geopolitical Uncertainty
We expect the Swiss National Bank to keep its policy rate at 0.00% at its meeting next week on June 18th. The key drivers for this are low domestic inflation and geopolitical uncertainty from the Iran war. This stability in interest rates means we should not anticipate significant price swings in short-term Swiss rate derivatives.
Our view is reinforced by recent Swiss inflation data, which showed a headline rate of only 1.2% in May. This is substantially lower than rates in the Eurozone or the US, giving the SNB no reason to consider a rate hike. The resulting interest rate differential between Switzerland and other major economies will continue to be a primary factor for currency traders.
SNB’s FX Intervention Policy And Implications For Traders
The SNB’s main tool will remain its vocal willingness to intervene in foreign exchange markets. We anticipate the bank will repeat its strong language about its “increased willingness to intervene” to prevent the Swiss franc (CHF) from strengthening. This stance effectively creates a cap on the CHF’s value, especially against the euro.
For derivatives traders, this suggests a strategy of selling volatility on the franc. We see opportunities in selling out-of-the-money call options on the CHF, particularly against the euro (EUR/CHF put options). This position benefits from both time decay and the low probability of a sharp appreciation in the franc, given the SNB’s explicit policy.
Historically, the SNB has demonstrated its ability to influence its currency through massive interventions, building up foreign reserves that exceeded CHF 750 billion in the first quarter. This immense firepower makes their current threats to weaken the franc highly credible. Therefore, betting on a sustained, strong rally in the CHF in the coming weeks appears to be a high-risk, low-probability trade.
