Swiss Franc Stages Biggest Rally in Years on SNB Rate Hike

(Bloomberg) — The Swiss franc staged its biggest rally in years against the euro and the US dollar after the Swiss National Bank unexpectedly hiked rates by 50 basis points.

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The euro dropped by the most against the franc since the outcome of the Brexit referendum in June 2016, sinking to as low as 1.0131 francs. The currency also strengthened almost 3% against the US dollar, the biggest advance in almost seven years. The rally continued even after the SNB vowed to intervene if the currency gained excessively, though it will also take action if it weakens.

The move rippled across other markets after the SNB said more tightening may be needed, with euro-area bonds sliding as money markets cranked up bets on rate hikes from the European Central Bank. Both policy makers have been laggards up to now in a global rush to lift borrowing costs to tackle rampant inflation.

“Over the coming quarter, we expect euro-franc to test parity as the Swiss National Bank continues to hike rates in line with market expectations as they aim for a stronger real franc,” said Simon Harvey, currency analyst at Monex Europe Ltd. “The SNB is unofficially targeting a stronger inflation-adjusted franc rate (real exchange rate) in order to reduce the level of imported inflation.”

The probability of the euro-franc pair trading below parity in a month’s time now stands at 24%, up from 7% at Wednesday’s close, according to options pricing compiled by Bloomberg. The pair touched parity in March.

Viraj Patel, a macro strategist at Vanda Research, said it was now clear the SNB’s “line in the sand” is probably somewhere below parity.

Deutsche Bank wrote in a note Thursday that the central bank decision further confirms their bullishness on the franc, and they expect the euro-franc pair to approach parity within the coming days. The firm is long the Swiss currency against the euro, dollar, and pound.

Barclays analysts echoed that sentiment, arguing that the franc will go even further, and drift below parity. “We expect more 50bp hikes and FX reserves reduction if the franc does not strengthen enough,” Wen Yan, an analyst for the bank, wrote in a note Thursday.

Swiss Franc Bulls Got a Clear Go-Ahead From the SNB

SNB President Thomas Jordan said that the central bank would be prepared to sell foreign currency if the franc were to weaken and buy foreign currency in the event of excessive currency appreciation. The SNB has previously allowed the franc to strengthen, which has helped stave off some inflationary pressures.

“Combined with the large rate hike, the signal to the market is even clearer than it has been in recent months: the SNB now desires a stronger Swiss franc,” Deutsche Bank said.

The SNB’s move came just hours after the Federal Reserve hiked rates by three quarters of a percentage point on Wednesday, its biggest increase since 1994. The ECB, which is seen hiking rates next month, also vowed action Wednesday to tackle any bond market fallout.

(Updates throughout.)

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