Favorable outlook for Swiss franc is supported by SNB FX selling, says BMO – Pound Sterling live | Omd Cialis

“The SNB’s balance sheet has shrunk at a rapid pace” – Stephen Gallo, BMO Capital Markets.

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The Swiss franc has climbed through the 2022 currency performance rankings since the end of last quarter, and asset sales by the Swiss National Bank are one of many factors contributing to the turnaround, according to strategists at BMO Capital Markets, who are led by the SNB released data quote last Friday.

The Swiss franc was closer to the bottom of the major currency rankings than to the top in the early days of June, but that was beginning to change after a landmark change in monetary policy stance by the Swiss National Bank last month that took financial markets by surprise.

“The SNB’s balance sheet has shrunk at a rapid pace. Foreign currency assets fell 10% over the January-June period, with the largest month-on-month decline occurring in June,” said Stephen Gallo, European Head of FX Strategy at BMO Capital Markets.

“Part of the 10% decline would also have reflected valuation changes across multiple asset classes and currency translation costs. But there is an element of political normalization in this mix,” Gallo wrote in a review of BMO forecasts for the Swiss franc on Friday.


BBO Charts

Source: BMO Capital Markets.


The SNB spontaneously raised its policy rate by 0.50% to -0.25%, but said just as importantly that it would take action in the FX market wherever there was an “excessive appreciation” of the franc, as well as “when the Swiss franc weaken.”

This came after inflation rates in Switzerland rose above levels consistent with the SNB’s definition of price stability and other central banks, including the Federal Reserve, Bank of England and the European Central Bank, were either already raising interest rates or preparing to do so prepared to begin.

“As another signal of Swiss policy normalization, domestic commercial bank demand deposits held at the SNB in ​​early July shrank by the most in five years (on a four-week basis, Figure 3),” Gallo said last week.


Source: BMO Capital Markets.


“Due to the size of the current account surplus, the SNB is in a better position than most central banks as it can indirectly use the CHF as a tool to curb imported inflation,” he added.

Gallo cited data released alongside the SNB’s mid-year report last Friday because he believed the bank had been actively selling some of its mountainous foreign exchange reserves to prevent the Swiss franc from compounding its inflationary challenge by depreciating this year.

This would be consistent with the SNB’s stance on the early June rate hike and is one of many factors why BMO is forecasting USD/CHF rates to remain at or below 0.95 for much of the coming year and for the EUR /CHF will fall to 0.94 in the next three months.


BMO CHF forecasts

Source: BMO Capital Markets.


“We expect the ECB to move quickly to neutral rates, which in turn should allow the SNB to continue its policy normalization. We expect the SNB to hike 50 basis points in September and another 25 basis points in December,” said Daniel Kalt, head of the chief investment office at UBS Global Wealth Management.

“Against this backdrop, we expect a gradual appreciation of the Swiss franc, while EURCHF is likely to remain below par as the looming gas crisis and political uncertainty weigh on the euro,” Kalt and colleagues said last week after forecasting that the SNB’s interest rate would rise 0.5% would be achieved by the end of the year.

The BMO team is not alone, having joined many others from across the market to look for further Swiss franc appreciation against a number of currencies including UBS Global Wealth Management and TD Securities in the coming weeks and months.


Source: TD Securities.


“We believe that EZ is headed for recession in the second half (unlike the ECB), limiting the capacity for aggressive rate hikes amid weak growth and a looming energy crisis. The latter will receive significant focus amid tightness concerns,” said Mazen Issa, a senior FX strategist at TD Securities.

“Meanwhile, we believe the SNB is poised to allow for FX strength to offset import price inflation. This, coupled with a more supportive current account backdrop (as opposed to the implosion in EZ), allows the CHF to be used to diversify away from well-occupied USD longs,” Issa said last week.

Issa and colleagues suggested last week that bank clients should consider selling EUR/CHF in anticipation of another slide towards 0.95 in the next month or two, citing the SNB’s proactivity on interest rates and inflation, and their foreign exchange policies.

TD Securities forecasts USD/CHF to fall from 0.95 to 0.93 by year-end and expects EUR-CHF to hit lows of 0.95 before settling to 0 by year-end .99 recovered. Meanwhile, the GBP/CHF rate is set to fall from around 1.15 this week to 1.13 by the end of the year.


TD Securities CHF Predictions

Source: TD Securities.

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