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The Swiss National Bank’s unexpected rate cut has turned the franc from the most successful currency in 2023 to the main underdog in 2024. However, SNB’s monetary policy is not the only reason behind this. Let’s discuss this topic and make up a trading plan for USDCHF and CHFJPY.
Monthly Swiss franc fundamental forecast
The Swiss National Bank has harmed its national currency. The regulator has overtaken the Fed and the ECB in launching a massive monetary expansion. SNB Chairman Thomas Jordan and his colleagues made it clear that they had curbed inflation, confirming the Swiss franc’s status as the main currency for carry trades. Meanwhile, the carry trade strategy is highly damaging for currencies in the current economic conditions.
According to SNB Vice Chairman Martin Schlegel, slowing inflation allowed the central bank to reduce the key interest rate to 1.5% from 1.75%. The official did not deny that the central bank closely monitored the Swiss franc and regularly intervened in the foreign exchange market. At the same time, the Vice Chairman did not outline a specific level for the franc’s exchange rate.
However, according to a study by the Swiss National Bank, it would take F27 billion to change the value of the currency by 1.1%. The authors estimate that if the SNB had not used negative interest rates between 2015 and 2022, it would have had to buy F550 billion of foreign currency to weaken the franc. Its reserves are currently estimated at F680 billion.
SNB foreign currency reserves
Source: Bloomberg.
The fact that the SNB has been at the forefront of the monetary expansion cycle makes the Bloomberg consensus forecast of 0.97-0.98 for EURCHF by the end of 2024 irrelevant. Bank of America expects the pair to reach parity this year due to the urgency of the SNB’s decisions, with EURCHF strengthening to F1.1 by the end of 2025. At the same time, it maintains its estimate of the size of the monetary expansion in Switzerland at 125 bps. It expects key rates to be cut by 100 bps this year and 25 bps next year.
EURCHF parity is possible in 2024. If the eurozone economy remains weak and the ECB cuts the deposit rate four or more times, the euro will join the group of forex outsiders.
Another thing is the franc sales against the yen. In 2023, carry trades involving the Japanese yen as a funding currency and Latin American monetary units generated a profit of 35%. Meanwhile, the Swiss franc brought much more modest profits using this strategy. However, changes in monetary policy could turn things around.
Carry trade efficiency dynamics
Source: Bloomberg.
The perfect funding currency should be weak and have low volatility. Both the yen and the franc are major underperformers among the G10 currencies. Since the beginning of the year, they have lost 7.5% and 7.8% against the US dollar, respectively. However, the Bank of Japan’s rejection of negative interest rates increases the yen’s volatility. The carry trade strategy involving the Swiss franc should become more profitable, particularly since the narrowing of the US-Japan bond yield differential suggests that the yen is undervalued.
Monthly USDCHF and CHFJPY trading plan
In this connection, selling CHFJPY is possible with the target at 165.9 and 164.5. Strong US labor market statistics for March will allow USDCHF to reach the targets of 0.91 and 0.92 earlier than previously forecast. With this in mind, it is better to keep your long trades open.
Price chart of USDCHF in real time mode
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