Swiss Franc "Currently in a Vulnerable Position"

File image of Martin Schlegel. Copyright: World Economic Forum / Greg Beadle.

Franc strength is now proving a problem for the Swiss National Bank (SNB).

The Swiss Franc is a predictable currency that is offering predictable headaches for its central bank.

SNB President Martin Schlegel said on Tuesday, "the Swiss franc appreciated really a lot... We have always said that we’re ready to intervene in the FX market if that's necessary for price stability."

The currency fell following the comments.

Schlegel's comments confirm the SNB is taking note of the CHF's recent strength, and this could leave it exposed to a bigger correction lower, says one currency strategist we follow.

"The Swiss franc is currently in a vulnerable position. The recent risk-off environment has driven the trade-weighted value of CHF to record highs, which is the opposite of what the SNB wants to see right now," says George Moran, FX strategist at RBC Capital Markets.

The Franc, an undisputed 'safe haven' in global foreign exchange, has been an outperformer during the surge in volatility that followed U.S. President Donald Trump's eye-watering tariff announcements on April 02.

However, a strengthening Franc is deflationary for Switzerland, as it lowers the cost of imports. The SNB, meanwhile, is worried that the country is slipping back into a deflationary environment, and is unhappy with what it sees as unhelpful CHF strength.

Also, a stronger currency makes domestic exports less competitive, giving another reason for the central bank to want a weaker currency.

"We think the conditions are ripe for the SNB to intervene and weaken the franc to counter imported deflation," says Moran.

Switzerland's April CPI inflation registered a softer-than-expected flat y/y reading on Monday, while the core reading softened to 0.6% y/y from 0.9% y/y the previous month.

According to RBC, over the past year, imported prices have been the primary driver of weak Swiss inflation, and unless the franc’s strength fades, the risk of deflation is likely to intensify.

Analysts at Rabobank think the Swiss Franc is set to ease back from current levels as it is becoming a "problem currency" for its central bank.

The prospect of direct currency market intervention by Swiss authorities has risen sharply. The prospect of negative interest rates is also now rising, with money markets now pricing in a return to sub-0% rates.

"There is a very strong chance that the SNB will cut rates again at its June 19 policy meeting. Market implied rates point to a 40 bp reduction in rates in a 3-month view, which would put them squarely back into negative territory," says Jane Foley, Senior FX Strategist at Rabobank.

The SNB has adopted a proactive approach to interest rates, cutting them on five occasions between March 2024 and March 2025.

"Remarks from Schlegel that policymakers have not ruled out negative rates and that they will intervene in the FX market if necessary are consistent with previous warnings. That said they were likely aimed at pushing back on CHF strength," says Foley.