Market Update - SNB cuts rates to zero, yet CHF extends recent gains

Highlights: The Swiss National Bank (SNB) lowered its key policy rate by 25bps to zero, marking the sixth consecutive interest rate cut. The Swiss were the first G10 nation to kick off the global easing cycle in March last year, having reigned in inflationary pressures from the COVID era. A key headache of the SNB today is that inflation turned negative in May, whereas CHF is up almost 11 per cent since the start of the year. A strong currency contributed to the SNB lowering its inflation forecasts, whereas trade uncertainties have contributed to risks to the growth outlook. A rise in safe haven flows from geopolitical uncertainties and a rotation away from the US dollar have contributed to a strong franc, which climbed higher despite today’s decision to lower rates.

• SNB Chairman Schlegel did not rule out negative rates in the future, however he equally cited “undesirable” negative side effects from such an eventuality, meaning that such a decision “would not be taken lightly.” We therefore don’t expect such a move anytime soon, even though the market is pricing in a 60 per cent probability this could happen by March next year
• CHF strengthened against both USD and EUR after the decision, even as prior guidance that the SNB “remains willing to act in the foreign exchange market” were reiterated. Although there were no major surprises in today’s conference, the Swiss yield curve rose across tenors, with the front end climbing as much as 10bps and the longer end between 4 and 5bps as the SNB was perceived as pushing back against a further interest rate cut for now
• We maintain a neutral view for EUR/CHF, as strong safe haven flows are balanced by the SNB’s reluctance of seeing excessive currency strength, as well as our expectation that EUR/USD could strengthen towards 1.20 by year end. Our neutral view on Swiss stocks is reflective of the need to clear the hurdle of trade uncertainty, with bilateral negotiations still unresolved and sectoral tariffs entailing risks. We nevertheless take comfort of the quality bias of Swiss stocks as well as the appeal of high dividend stocks for domestic investors in light of zero domestic policy rates