Synopsis:

ING discusses the recent uplift in EUR/CHF exchange rates, attributing it largely to the re-pricing of the ECB's rate curve which has led to increased swap rate differentials between the Eurozone and Switzerland.

Key Points:

• Rate Differential Impact: The significant rise in Eurozone two-year swap rates, increasing by 60 basis points since January, contrasts with relatively stable Swiss rates. This divergence has been a key driver behind the recent appreciation of EUR/CHF.

• ECB Rate Cut Projections: ING predicts the European Central Bank (ECB) will implement three rate cuts this year, a more aggressive stance compared to the current market pricing of 68 basis points in cuts. This discrepancy presents a potential risk to further substantial gains in EUR/CHF.

• Forecast and Policy Outlook: ING maintains a near-term EUR/CHF forecast around 0.98 and anticipates a year-end rate of approximately 1.00. This outlook is based on the expectation that the Swiss National Bank (SNB) will adopt a more dovish approach than the ECB, potentially including the strategic use of foreign exchange policies to manage the CHF's strength.

Conclusion:

While the current re-pricing of the ECB curve has lifted EUR/CHF, the potential for additional significant gains may be limited if ING's predictions of more aggressive ECB rate cuts materialize.