Euro Zone Government Bond Yields Rise Before PMI Data

The Swiss franc's rapid appreciation on US policy uncertainty could force the Swiss National Bank to intervene soon, as Swiss industry hopes the safe haven currency's surge can be tamed before it deals another blow to a tariff-threatened sector.

The franc has surged roughly 9% against the dollar so far this month, and is set for the biggest monthly gain since the 2008 financial crisis. Last week it hit its strongest level since January 2015 when the SNB scrapped its minimum exchange rate.

That has pulled the franc, also known as the Swissie, up 2.6% against the euro in April, taking it close to its strongest level in more than 10 years.

But the rush into the franc, spurred by concerns about US President Donald Trump's trade policy gyrations, puts the SNB's 0%-2% inflation target at risk by depressing the cost of imports at a time when inflation is already near zero.

It also hurts Swiss exporters potentially facing 31% US tariffs by making their goods dearer abroad.

"The rise of the Swiss franc is the final ingredient for a poisonous cocktail for Swiss industry," said Jean-Philippe Kohl, vice director of industry association Swissmem.

"Companies are already struggling with weak demand abroad, the threat of massive American tariffs on Switzerland, and uncertainty caused by President Trump's trade policy."

Swissmem refrained from demanding SNB action, but would welcome any moves by the central bank to mitigate the franc's rise, Kohl said.

Interventions, rather than rate cuts, are probably the SNB's best tool, with its key rate already at 0.25% and expected to dip further, analysts say.

"If everybody is fearful and insecurity is high, nobody really cares about the interest rate in Switzerland," said Thomas Stucki, former head of asset management at the SNB and Chief Investment Officer at St Galler Kantonalbank.

Selling francs to weaken the currency would be a shift for the SNB, which bought only 1.2 billion francs of forex last year and sold foreign currencies worth nearly 133 billion francs in 2023 as it sought to shore up the Swissie to cool inflation.

Interventions carry their own risks, such as Washington branding Switzerland a currency manipulator. This occurred in 2020 during Trump's first administration.

ING's global head of markets Chris Turner said one factor in the background driving Swissie strength, on top of safe-haven flows, was markets questioning "whether the SNB will be as able to undertake large scale FX buying as they have in the past."

Pain threshold?

The SNB said this month it does not engage in currency manipulation and only intervenes to foster price stability. It has also said it could return to negative rates.

But negative rates were unpopular with banks, savers and pension funds when the SNB imposed them from late 2014 to 2022, making interventions look easier to manage.

UBS economist Maxime Botteron did not rule out that limited sales of francs by the SNB were already underway, but he did not expect systematic interventions.

"Interventions are more flexible than interest rate cuts – the SNB can go into the market, sell some francs to ease the appreciation, and then stop," he said.

The SNB declined to comment on the franc's value or how it would react.

It's the currency's rally against the euro that policymakers are likely watching most since the bulk of Swiss trade is with eurozone members, giving euro-denominated imports more influence over inflation. In 2023, 57% of Swiss imports were invoiced in euros, compared with 13% in dollars.

The central bank has said it does not look at particular currency pairs, but a basket of currencies when deciding policy, and would act to meet its inflation target.

Swiss Re's Head of Macro Strategy Patrick Saner said intervention was likely, especially with the real effective exchange rate of the franc reaching post-2015 highs.

"The speed and magnitude of the recent Swiss franc rally, particularly since April 2, significantly raises the odds that the SNB is close to seeing this as a "threshold moment" for intervention," he said.

"While political optics matter.... intervention remains likely if price stability is at risk."

Source: Theedgemarkets

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The White House has recently made headlines with its amendment to reciprocal tariffs and updated duties as applied to low-value imports from the People's Republic of China. This development signals a potential shift in U.S.-China trade relations, as ongoing discussions indicate progress towards a more comprehensive trade deal.

As the Biden administration navigates the complexities of international trade, the focus remains on fostering positive relations with key partners, including Japan and India. The latest updates suggest that while agreements are close, they may lack specific details that could impact their implementation.

Stay tuned for further developments as the White House continues to engage in discussions that could reshape the landscape of international trade.

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US Regulations and Their Impact

Discussions Within the EU

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The view of Nanjing Road East Pedestrian Mall, the main shopping street in Shanghai.

Source: CNBC

That’s the setup right now. The situation has been building for weeks, and it’s getting worse. The US government is all over the place under Trump’s second term, and nobody trusts what’s coming next.

Investors have started dumping the dollar and US Treasurys, and the numbers show just how bad it’s gotten. The dollar index has fallen more than 9% this year. The latest Global Fund Manager Survey from Bank of America shows that 61% of managers expect the dollar to lose more value over the next 12 months.

That’s the worst sentiment these managers have had about the dollar in nearly two decades.

Safe currencies surge as the dollar bleeds

The greenback’s collapse has pushed other currencies higher, especially the so-called safe ones. The Japanese yen is up by more than 10% against the dollar this year while the Swiss franc and euro are each up by over 11%, according to data from LSEG at press time.

These surges sound nice, yes, but they’re actually a problem. A strong currency makes exports more expensive, and for countries that rely on selling stuff abroad, that’s a problem they don’t need right now.

The Mexican peso has surged by 5.5%, the Canadian dollar is up by over 4%, the Polish zloty climbed by more than 9%, and the Russian ruble jumped by a huge 22% against the dollar this year, LSEG’s data shows.

But not all currencies are rising. Some are crashing hard. The Vietnamese dong and Indonesian rupiah dropped to their lowest ever levels against the dollar this month. The Turkish lira also hit a fresh record low last week. Even China’s yuan, which dipped to a new low two weeks ago, has only barely bounced back.

Adam Button, who works as chief currency analyst at ForexLive, said the weakness of the dollar is something central banks have been waiting for. “Most central banks would be happy to see 10%-20% declines in the US dollar,” he said.

Button pointed out that dollar strength has been a pain in the ass for years, especially for countries that either peg to the dollar or have big dollar-denominated debts. When the dollar is weak, it lowers their repayment costs. It also helps kill off imported inflation, since a stronger local currency means cheaper imports. That gives central banks space to cut rates and try to get their economies moving again.

Central banks hesitate as inflation, capital flight risks grow

But that’s just the upside. Button said the other side of the coin is the problem with exports. A strong local currency makes a country’s goods more expensive in global markets. That’s especially bad in Asia, which handles most of the world’s manufacturing.

This is why countries like Indonesia are unlikely to slash rates anytime soon. Their currency is already too unstable. But places like India or South Korea might still have some space to cut. The problem is that once rates drop, investors might move their money into US assets chasing better yields, which triggers capital outflows.

Switzerland is in a league of its own. Button pointed out that 75% of Swiss GDP comes from exports, and a strong franc has been a nightmare for the last 15 years. During global panic, investors always run to the franc, pushing it even higher. If this keeps up, Button said Switzerland might have no choice but to devalue.

Some countries are using the window of falling inflation. The European Central Bank dropped rates by 25 basis points at its April meeting. They said inflation is falling toward their 2% goal, so they’ve got room.

Source: CryptoSlate