UBS Forecasts EUR/CHF to Retest 0.96 as Swiss Franc Lags on Low Yield

The Swiss franc is facing continued pressure from its low yield, leading analysts at UBS to project the EUR/CHF currency pair could retest the 0.96 level in the near term as interest rate differentials widen.

Widening Yield Differentials

According to a note from the Swiss bank, the franc is struggling as hawkish monetary policy from the European Central Bank, U.S. Federal Reserve, and Bank of England drives yields higher elsewhere. This policy divergence, coupled with rising energy prices, has already pushed the EUR/CHF exchange rate above 0.94.

UBS noted that the franc's significant yield disadvantage continues to weigh on its total returns, making it less attractive for investors seeking carry trades.

Diverging Central Bank Policy

The forecast hinges on the policy path of the Swiss National Bank (SNB) relative to its G10 peers. UBS stated it does not anticipate an interest rate hike from the SNB at its upcoming September meeting.

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Should the SNB remain on hold while other central banks maintain a hawkish stance, the yield gap would widen further, likely increasing pressure on the franc and fueling a move higher in EUR/CHF, the bank said.

Market Outlook

While UBS sees the potential for a near-term rally, the firm also suggested that a move toward 0.96 could create an "attractive opportunity to lock in higher levels." This outlook aligns with the bank's medium-term view that the currency pair will eventually trend lower.

UBS expects this longer-term reversal to occur once the SNB eventually begins its own tightening cycle, which would cause the rate differentials to narrow. The firm also stated its belief that markets have become "overly hawkish on rates" in general.