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UBS: Wide Interest Rate Gap to Support Dollar Against Swiss Franc
Summary
Analysts at UBS expect the U.S. dollar to remain strong against the Swiss franc, citing the significant interest rate differential following the Swiss National Bank's decision to hold its policy rate.
The U.S. dollar is likely to find continued support against the Swiss franc due to a substantial interest rate differential, according to analysts at UBS. The view follows the Swiss National Bank’s (SNB) recent decision to keep its policy rate on hold, which UBS believes reinforces the currency pair's current dynamics.
SNB Holds Steady as UBS Eyes Future Hikes
The SNB's decision to maintain its current policy rate was not accompanied by an "overly hawkish tone," according to a note from UBS strategists Constantin Bolz and Clémence Dumoncel. While Swiss inflation rose to 0.8% year-over-year in August from 0.4%, the report stated that domestic inflationary pressures remain limited.
Following the meeting, UBS economists have adjusted their outlook for SNB policy. They now forecast two rate hikes in March and June 2027, bringing forward their previous expectation from mid-2027.
Yield Gap and the Franc's Shifting Role
The significant gap between U.S. and Swiss interest rates creates a "favorable carry backdrop" that should limit sustained appreciation of the Swiss franc before year-end, UBS stated. This dynamic encourages investors to borrow in a low-yielding currency like the franc to invest in higher-yielding, dollar-denominated assets.
AdAccording to the report, the franc's traditional role as a safe-haven asset has been increasingly overshadowed by its use as a funding currency. This trend has been amplified as the Japanese yen, another popular funding currency, has become less attractive following a rate hike by the Bank of Japan and the persistent risk of currency intervention.
Forecasts and Key Levels
UBS maintained its USD/CHF forecasts at 0.81 for December and 0.79 for March, noting that near-term risks are skewed to the upside. The currency pair could potentially test the 0.84-0.85 range in the coming months, according to the bank.
Over the medium term, however, UBS expects USD/CHF to trend lower as policy support from the U.S. Federal Reserve fades and the SNB eventually begins its own tightening cycle. The bank identified key technical levels for the pair:
- Support: around 0.80 and a subsequent level just below 0.77.
- Resistance: near 0.84 and 0.8580.
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