Swiss growth and firm PMI readings have not translated into pressure for near-term Swiss National Bank tightening, as inflation remains subdued and policy remains geared against excess franc strength. Headline CPI rose 0.6% year on year in April, while core inflation printed 0.3% year on year, keeping the real-economy backdrop supportive of a patient stance on rates.
In March, the SNB said inflation was likely to rise more strongly in coming quarters due to the Iran war, and it also stated that its willingness to intervene in the FX market had increased. Since the last trading day in February, the CHF has been the third worst-performing G10 currency, a move consistent with limited safe-haven demand under the combination of low rates and a more intervention-ready central bank. Markets continue to monitor prospects for a peace deal and evidence of a re-opening of the Strait of Hormuz, where uncertainty could still trigger renewed demand for perceived safe havens.
SNB Policy, CHF Weakness, and Volatility Strategies
Given the very low Swiss inflation, with the headline rate at just 0.6% in April, we see little reason for the Swiss National Bank to change its dovish stance. The central bank has been clear about its increased willingness to intervene in currency markets to weaken the franc. This has successfully capped the franc’s strength, making it one of the G10’s worst performers since late February.
This environment suggests that selling Swiss franc volatility could be a profitable strategy in the coming weeks. With the EUR/CHF exchange rate currently stable around 0.9850, the SNB has demonstrated its ability to put a floor under the pair, limiting franc appreciation. We can see implied volatility on one-month options remaining subdued near 4.5%, presenting an opportunity to collect premium by selling franc calls.
Risks From Geopolitical Tensions and Hedging Approaches
However, we must remain alert to the significant geopolitical risk from the war in Iran. Any escalation, particularly concerning the Strait of Hormuz, could trigger a sudden rush into the franc as a safe haven, overriding the SNB’s efforts. We only have to look back to the start of the Ukraine conflict in early 2022, when EUR/CHF plunged from 1.04 to below parity in a matter of weeks.
Therefore, we believe a prudent approach is to structure trades that benefit from the current stability while hedging against a sudden shock. This could involve buying cheap, out-of-the-money put options on pairs like EUR/CHF or USD/CHF. These positions act as low-cost insurance, providing significant upside if geopolitical tensions boil over and force a flight to safety in the franc.
