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The CHF's Mardi Gras celebrations are devoid of any late indulgence, as its February losses have deepened due to the unexpected downturn in the Swiss CPI data. Credit Agricole longstanding warning about the CHF's robust start to 2024, coupled with the SNB's altered stance on FX interventions in December, has manifested in the currency's struggles.
While a single CPI data point may not trigger an immediate shift to rate cuts by the SNB, the CHF could face further losses by the end of March. Swiss inflation, though remaining in the upper range of the SNB's target, and domestic interest rates not reaching restrictive levels, suggest a cautious outlook. However, our Q124 forecasts of 0.97 and 0.90 for EUR/CHF and USD/CHF respectively persist.
CHF CPI
The CHF's underperformance in February, aligning it with the JPY as YTD laggards, is attributed to global factors. The easing of rate cut expectations by major central banks and an extended risk rally have alleviated pressure on the CHF, which started 2024 as its strongest on a real effective basis since 2015.
Beyond global influences, domestic factors contribute to the CHF's performance in 2024:
1. Inflation: The January Swiss CPI's significant cooling to 1.3% YoY raises questions about the SNB's central case of higher domestic inflation throughout the year.
2. FX interventions: Despite initial doubts after the SNB's December meeting, consecutive increases in FX reserves in December and January indicate a halt in selling.
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3. Valuations: The REER monthly series of the BIS revealed a sharp 2% increase in December, the highest since 2015, impacting CHF's standing.
The Swiss CPI miss prompts speculation about the SNB's reaction:
1. Lower inflation target: The SNB aims for an annual CPI rise of less than 2%, and Swiss inflation has been within target since June.
2. Mild rate tightening: The SNB's rate hikes have been less aggressive than other G10 central banks.
3. Factors affecting CPI: Energy prices, transport, and clothing prices contributed to the downturn, with seasonal sales' impact yet to be fully assessed.
While Swiss money markets suggest a March SNB rate cut – As Bloomberg News Says, the case for immediate easing appears weak. Upcoming FX developments could play a crucial role, with a continued reversal of CHF strength offering relief to the Swiss economy. The lower-than-expected Swiss CPI marks may help deflate the CHF's real effective valuations.
Bloomberg SNB Rate Cut Expectations
Regardless of the timing, the SNB is expected to loosen monetary policy less than other G10 central banks. The CHF's reaction to the SNB's March decision might be short-lived. In conclusion, the surprising Swiss CPI slowdown reinforces this year's CHF reversal, and the currency may continue to give up ground in the near term, aligning with my Q124 forecasts 0.97 and 0.90 for EUR/CHF and USD/CHF respectively.
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