Outlook for the Swiss franc in 2024

What can traders expect after a bumper 2023?

© Keystone

The Swiss franc (CHF) ended 2023 with an impressive performance in the global foreign exchange market, leaving investors and traders curious whether the CHF can maintain its impressive run into the new year.

It is therefore essential to reflect on the elements behind the strength of the Swiss franc as well as its political and economic prospects.

Looking back at the year 2023: A year of domination of the franc

By 2023, the Swiss franc (CHF) has established itself as a dominant currency, surpassing the major G-10 currencies. The figures are revealing: the CHF appreciated by 8.3% against the US dollar, by 5.1% against the euro and by 2.9% against the pound sterling. It made a remarkable 17.5% jump against the Japanese yen, while performing strongly against other currencies.

This exceptional performance is illustrated in the following table:

Source: Koyfin, data as of 12/26/2023

Key factor in the strength of the franc: The SNB's foreign exchange reserve policy

The remarkable surge of the franc in 2023 is not only due to traditional interest rate dynamics. It owes a lot to the astute management of the reserves of the Swiss National Bank (SNB).

Although it lags behind other major central banks in terms of interest rate hikes, it has only raised 75 basis points in 2023, compared to 100 basis points for the Fed. 175 for the Bank of England and 200 for the ECB, the SNB has adopted a unique approach.

They boosted the franc by selling foreign currency reserves, reducing these reserves from 784 billion Swiss francs in January 2023 to 641.7 billion Swiss francs in November 2023, the lowest level in six years. This strategy made it possible to effectively temper inflation, by mitigating the impact of volatile commodity prices and inflation linked to imports, without resorting to rate increases which could have harmed the Swiss economy.

As a result, Switzerland experienced a 1.3% year-on-year decline in producer prices in November 2023, marking the seventh consecutive period of decline and the largest decline since January 2021. At the same time, annual inflation slowed to 1.4% in November 2023, its lowest level since October 2021.

Switzerland's foreign exchange reserves have declined significantly since the 2022 peak

Source: TradingView

Political and economic outlook for 2024

At its last monetary policy meeting in December, the SNB kept interest rates at 1.75%, in line with market expectations. The crucial development, however, lies in the SNB's communication on its exchange rate policy.

In its statement, the SNB surprised many by changing its foreign exchange market intervention strategy, removing the previous bias towards selling currencies. This change suggests that the SNB may now view the strength of the Swiss franc as acceptable, indicating a more balanced approach in the near future, which could temper its broader assessment.

SNB Governor Thomas Jordan stressed that the nominal appreciation of the Swiss franc plays a critical role in controlling inflation, emphasizing that current monetary conditions are conducive to maintaining inflation within the target range, which eliminates the need for a specific directional bias in the forex market.

Although the SNB did not hint at future rate cuts, it left the door open for policy adjustments if the exchange rate became too strong. Currently, money markets are pricing in a rate cut of around 20 basis points at the March meeting, and a cumulative easing of 64 basis points by September.

In 2024, Swiss inflation is expected to increase, mainly in the second and third quarters, to a maximum of 2.0%. This increase is attributed to factors such as increased electricity prices, rents and VAT.

However, economic expansion is expected to remain modest in the coming quarters due to weak international demand and tightening financial conditions. The SNB forecasts that Swiss GDP growth will be between 0.5% and 1% in 2024.

USD/CHF technical analysis

Source: TradingView

For traders monitoring the USD/CHF pair, it is interesting to note that it recently hit a 9-year low of 0.85, marking a 7.6% decline since the start of the year. Price action was mostly bearish during the second half of December, with 12 of the 14 sessions closing in the red.

Taking a closer look at the daily chart, prices are currently trading 3.3% below the 50-day moving average and 4.5% below the 200-day moving average. The Relative Strength Index (RSI) is in oversold territory at 24, indicating a potential reversal.

Currently, the technical setup is bearish, with an intact ascending channel dating back to October 2022. However, traders should also be aware of potential signs of bearish exhaustion, given the dollar's rapid sell-off in recent periods.

If the pair continues its descent toward or near 0.80 by the end of Q1 2024, potentially testing the lower channel line, traders could anticipate a resurgence of bullish sentiment.

In the coming months, the direction of the USD/CHF pair is expected to be heavily influenced by Federal Reserve policy.

If the US central bank aligns its monetary policy with market expectations, potentially cutting rates by 150 basis points in 2024, the US dollar may not strengthen significantly against other currencies.

Conversely, if the Federal Reserve takes a tougher approach and implements fewer rate cuts than expected, it could provide an opportunity for dollar bulls to regain momentum.

In conclusion, the exceptional performance of the Swiss franc in 2023 is due to the unique reserve management strategy of the SNB. For 2024, the strength of the Swiss franc may continue, but it will also be influenced by global economic conditions and central bank policies.

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