The Euro to Swiss Franc (EUR/CHF) exchange rate has exhibited intriguing dynamics in the first half of the year, largely dictated by the interest rate spread between the Eurozone and Switzerland. This analysis delves into the factors influencing EUR/CHF, providing insights into its past movements and future trajectory.
Initially, as global interest rates experienced a sharp decline last December, EUR/CHF touched a low of 0.93. However, the persistence of inflation and the subsequent rebound in global interest rates, spearheaded by the US, propelled EUR/CHF upwards into May. This upward movement underscores the principle that Swiss interest rates react less intensely to global rate fluctuations compared to Eurozone rates. Consequently, the interest rate differential between the two regions becomes a crucial driver, fluctuating in tandem with broader global economic narratives.
A significant observation is the apparent lower limit for market expectations regarding the Swiss National Bank (SNB) policy rate. Markets seem hesitant to anticipate the SNB rate falling below 0.50%, suggesting a considerable barrier against the re-implementation of negative interest rates. Conversely, market forecasts for the European Central Bank (ECB) terminal rate within its easing cycle hover around 2.00-2.25% for the upcoming year. Should economic conditions worsen, there’s potential for market expectations to adjust ECB rates below 2.00%, leading to a further contraction of rate spreads and a subsequent depreciation of EUR/CHF.
Examining the relationship between EUR/CHF and the ECB-SNB rate spread provides valuable insights. By utilizing the 1-month EUR and CHF Overnight Index Swap (OIS) rates priced one year forward, we can gauge market expectations. A modeled rate, derived from the correlation between this spread and EUR/CHF during the first half of the year, estimates a potential EUR/CHF trading level near 0.96. This suggests that when EUR/CHF traded around 0.92, the 3-4 centime “over-valuation” may have reflected a risk premium stemming from the carry trade unwind and volatility spikes associated with equity sell-offs.
Looking ahead to 2025, with anticipated global interest rate reductions led by the Federal Reserve, coupled with uncertainties surrounding US elections and Eurozone budgetary adjustments, the forecast leans towards EUR/CHF trading within the lower half of a 0.92-0.98 range for the remainder of the year. This outlook emphasizes the continued influence of global rate trends and geopolitical factors on the euro to swiss franc exchange rate.
