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UBS: Interest Rate Gap to Buoy USD/CHF After SNB Holds Policy Steady
Summary
The Swiss National Bank's decision to maintain its policy rate will continue to support the U.S. dollar against the Swiss franc, driven by a significant interest rate differential, according to analysts at UBS.
The Swiss National Bank's (SNB) decision to hold its policy rate steady is set to provide ongoing support for the U.S. dollar against the Swiss franc, primarily due to a substantial interest rate differential, according to a new analysis from UBS. While the bank's strategists believe market expectations for Federal Reserve tightening have become overly aggressive, the policy gap between the two central banks remains a key driver for the currency pair.
SNB Stance Underpins Dollar
UBS strategists Constantin Bolz and Clémence Dumoncel noted in a report that the SNB did not signal an overly hawkish stance at its latest meeting. Although Swiss inflation rose year-over-year to 0.8% in August from 0.4%, the strategists observed that domestic inflationary pressures remain relatively modest.
In response to the latest developments, UBS economists have advanced their forecast for SNB policy tightening. They now expect the central bank to deliver two rate hikes in 2027, one in March and another in June, which is earlier than their previous projection of mid-2027.
Franc's Role as a Funding Currency
The Swiss franc's characteristics as a funding currency are increasingly overshadowing its traditional appeal as a safe-haven asset, UBS stated. A favorable environment for carry trades—borrowing in a low-interest currency like the franc to invest in a higher-yielding one like the dollar—is expected to cap significant franc appreciation through the end of the year.
AdThe strategists also pointed out that the Japanese yen has become less attractive for funding carry trades due to risks of Bank of Japan rate hikes and potential currency intervention. This has enhanced the Swiss franc's relative appeal for this strategy.
Price Outlook and Key Levels
In the near term, UBS suggests the USD/CHF pair could remain elevated and potentially test the 0.84 to 0.85 range in the coming months. The bank maintained its price forecasts for the pair, targeting 0.81 by December and 0.79 by March of next year, noting that near-term risks are skewed to the upside.
Over the medium term, however, UBS anticipates a downward trend for USD/CHF as the tailwinds from Federal Reserve policy fade and the SNB begins its own tightening cycle. Key technical levels identified by the bank include initial support near 0.80 and a stronger floor just below 0.77, with resistance seen at 0.84 and 0.8580.
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