UBS Forecasts EUR/CHF to Test 0.96 as Low Yield Weighs on Swiss Franc

The Swiss franc's persistent low yield could push the EUR/CHF exchange rate to retest the 0.96 level in the near term, according to a new analysis from UBS. The bank points to diverging monetary policy paths between the Swiss National Bank and other major central banks as the primary driver for the franc's underperformance.

Diverging Monetary Policy

The franc's recent weakness stems from its significant yield disadvantage against other G10 currencies. In a note to clients, UBS stated that expectations for continued monetary tightening from the European Central Bank (ECB), the U.S. Federal Reserve, and the Bank of England have widened these yield differentials, pushing the EUR/CHF cross above 0.94.

UBS anticipates little change from the Swiss National Bank (SNB) at its upcoming September meeting and does not foresee a rate hike. This contrasts sharply with the hawkish stance maintained by other central banks, making the franc less attractive to hold from a yield perspective.

Near-Term Outlook and Key Levels

Should the SNB remain on hold as expected, UBS projects the EUR/CHF pair could climb further to challenge the 0.96 mark. The bank's analysis suggests such a move would create an "attractive opportunity to lock in higher levels."

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Until the SNB shifts its policy, the franc is expected to remain under pressure. UBS highlights that the strong carry disadvantage—the cost of holding a lower-yielding currency versus a higher-yielding one—will likely continue to weigh on the total returns for investors holding the Swiss currency.

Medium-Term Reversal Expected

While the near-term outlook is bearish for the franc, UBS suggests the current upward trend in EUR/CHF may be temporary. The firm's medium-term forecast calls for the cross to eventually trend lower.

This reversal is anticipated to occur once the SNB eventually begins its own tightening cycle. According to UBS, such a move would cause rate differentials to narrow, restoring some of the franc's relative appeal to investors.