Investors are pricing in Swiss National Bank tightening despite subdued inflation and weak GDP data, challenging the franc’s strength.
Market positioning in the Swiss franc (CHF) has become stretched as traders anticipate rate hikes the Swiss National Bank (SNB) is unlikely to deliver. Subdued inflation and softer-than-expected Q1 GDP data reduce the case for tightening, while an impending European Central Bank (ECB) hike could further weigh on external demand.
Swiss headline inflation remains at relatively normal levels sequentially, and GDP growth surprised to the downside. The SNB’s conditional inflation forecasts offer little justification for rate increases, with policy expected to remain cautious. The franc’s overheld position versus the euro reflects mispriced expectations, a rare occurrence given its typically low or negative yield.
The SNB has historically discouraged CHF purchases, and current market dynamics conflict with its stance. With the ECB moving toward tightening, the SNB is unlikely to shift course, potentially increasing risks to Swiss economic activity from weaker demand among trading partners.