UBS says the Swiss franc is continuing to face headwinds tied to its relatively low yield, as broader shifts in yields and energy prices have favoured other currencies. The bank points to rising energy costs and market expectations that the European Central Bank, the Federal Reserve and the Bank of England will pursue further monetary tightening as factors that have enlarged yield differentials and driven EUR/CHF above 0.94.
In UBS's view, the Swiss National Bank is unlikely to change policy at its September meeting. The bank does not expect the SNB to raise rates at that meeting. If the SNB remains on hold while other G10 central banks maintain a hawkish stance, UBS says EUR/CHF could retest 0.96, which the bank describes as an attractive level to lock in higher euro positions.
UBS also argues that markets overall have become too hawkish on policy rates. The firm reiterates that the franc's low yield versus other currencies continues to place it under pressure. That carry disadvantage, UBS says, should keep weighing on Swiss franc total returns until policy differentials narrow.
Looking beyond the near term, UBS expects a moderation of EUR/CHF. The bank sees the euro-franc cross potentially moving higher in the immediate period, but it anticipates the pair will trend lower over the medium term as the SNB eventually begins tightening and rate differentials decrease.
Until such a shift in Swiss policy arrives, UBS cautions that the franc's performance will be constrained by the strong carry disadvantage relative to other G10 currencies, a factor it says will continue to act as a drag on CHF total returns.
Key points
- UBS highlights low Swiss yields as a persistent source of pressure on the franc, contributing to EUR/CHF rising above 0.94.
- The bank expects no change at the SNB's September meeting and does not anticipate a rate hike there.
- UBS sees a potential near-term retest of EUR/CHF at 0.96 if the SNB stays on hold while other G10 central banks remain hawkish, but expects a medium-term decline once the SNB tightens.
Risks and uncertainties
- Persistence of hawkish policy from other G10 central banks could continue to widen yield differentials and keep pressure on the franc - impacting FX and fixed-income markets.
- If the SNB does not signal tightening over the medium term, the franc's carry disadvantage may remain, weighing on CHF total returns for investors.
- Markets' apparent overestimation of future rate moves introduces uncertainty about the near-term path of EUR/CHF.