Swiss Franc Pressured by Low Yields, EUR/CHF Could Test 0.96, UBS Says

The Swiss franc is facing sustained pressure from its low-yield status, a factor that could drive the EUR/CHF currency pair to re-test the 0.96 level, according to an analysis from UBS.

Widening Yield Gaps Weigh on Franc

Analysts at the Swiss bank noted that widening yield differentials are the primary driver of the franc's weakness. The EUR/CHF exchange rate has already pushed past the 0.94 mark as rising energy prices and hawkish market expectations for further monetary policy tightening from the European Central Bank, U.S. Federal Reserve, and Bank of England boost other currencies.

UBS stated that because of the franc's relatively low yield, it continues to face downward pressure. The high cost of carry, or the expense of holding a lower-yielding currency against a higher-yielding one, is a significant drag on the franc's total return performance.

SNB Policy Meeting in Focus

Looking ahead, UBS does not anticipate significant changes from the Swiss National Bank's (SNB) upcoming monetary policy meeting in September, viewing an interest rate hike as unlikely. The bank's strategists believe market expectations for future rate hikes have become excessive.

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Should the SNB remain on hold while other G10 central banks maintain their hawkish stances, UBS projects that the EUR/CHF pair could test the 0.96 level. The bank suggested such a move would provide an opportunity for investors to lock in gains at a higher level.

Short-Term Headwinds, Medium-Term Reversal

While UBS sees the potential for further near-term gains in EUR/CHF, its medium-term outlook suggests a downward trend for the pair. This reversal is expected once the SNB eventually begins its own tightening cycle, which would cause the interest rate gap with other currencies to narrow.

Until then, the significant carry cost disadvantage is expected to continue weighing on the Swiss franc's performance.