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Swiss Franc Bought at Nomura as GBP/CHF Tipped for Slide to 1.0555  

 

"For today, what’s more clear to us is that the BoE has already signalled a dovish turn, while the SNB has made it clear it’s uncomfortable with the low level of CHF currently. This is why we enter a fresh short GBP/CHF position," - Nomura 

 

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The Swiss Franc has turned the major currency league table on its head to become the second best performer of 2022 but it could rise further against Sterling and may even have scope to push GBP/CHF back to 1.0555 in the months ahead, according to analysts at Nomura.

Switzerland's Franc had given the Japanese Yen stiff competition for the bottom spot in the performance rankings of the major currencies during early months of the year but hawkish turn by the Swiss National Bank (SNB) and a favourable foreign exchange policy have upended the earlier order of performances. 

This and a fall from grace by Sterling have seen GBP/CHF fall from above 1.20 in the opening half of the year to within a whisker of parity during the later stage of September and although GBP/CHF has rebounded somewhat since then, Nomura is betting that renewed losses are likely up ahead.

"The SNB wants a stronger currency and is hinting at FX intervention," writes Jordan Rochester, a strategist at Nomura, in a Monday research briefing. 


Above: GBP/CHF shown at daily intervals. 


"SNB Chairman Jordan commented on Friday (Bloomberg) that current monetary policy is not sufficiently restrictive to bring inflation back to the range of price stability over the medium term, using the words the SNB prepared to take “any and all measures necessary” to return inflation to price stability including the possibility of FX sales (CHF buying FX intervention)," Rochester explained.

The SNB suprised economists and markets back in June when raising its cash rate from a historic subzero low of -0.75% but just as importantly the bank also said that it would be prepared to support the Swiss Franc in the currency market. 

While the SNB is still willing to suppress the Franc if it appreciates too far for its liking the SNB has also become open to buying back its own currency wherever market conditions lead the Franc to weaken as the latter would threaten to lift Switzerland's inflation rate further.

"This was done in order to counter the risk of a further build-up of inflationary pressures and to bring inflation back within the range of 0% to 2% that we equate with price stability," Chairman Thomas Jordan said last week. 

"We do not aim to fine-tune inflation within this range. However, when faced with large shocks that increase the risk of persistent movements of inflation away from the range, determined action is necessary, irrespective of whether these movements are below or above the range," he added. 


Above: GBP/CHF shown at weekly intervals. 


Although rising interest rates can be a draw for speculative traders the SNB's commitment to keeping its currency underpinned is at least as notable a development for the Swiss Franc outlook and one that could enable further gains over the likes of the Pound.

"For today, what’s more clear to us is that the BoE has already signalled a dovish turn, while the SNB has made it clear it’s uncomfortable with the low level of CHF currently. This is why we enter a fresh short GBP/CHF position," Nomura's Rochester said on Monday. 

Economist and analyst forecasts for the Bank of England (BoE) Bank Rate have risen significantly this year in reponse to business and household energy costs that have lifted the UK inflation rate into the double digit percentages since the onset of the conflict in Ukraine back in February.

This has played out against a backdrop of deteriorating economic conditions in Britain where rising interest rates are now adding to the cocktail of factors sapping demand from the economy, leading some analysts to speculate that the BoE may be likely to disappoint market expectations in the months ahead.

All of this is a part of why Nomura suggested on Monday that clients sell GBP/CHF around 1.1160 and target a fall to 1.0550 by the end of January.


Above: GBP/CHF shown at monthly intervals.