AFS Markets Blog: Midday 02/09/2026

• Meanwhile in markets, forget the yen for a second – in FX the Swiss franc's slide deserves some real attention. Over in fixed income, Bund yields are up 3–5 bps across the curve as Middle East turmoil continues;

• Trading at 0.943, EURCHF has surged to a one-year high this session. The broad Swiss franc has dropped nearly five percent since the early days of the Iran war back in March. The Swiss franc has faced pressure over recent months as interest rate differentials widen against the US and the Eurozone – where central banks have either hiked rates in response to war driven inflation and/or are expected to in the coming meeting. Turn to Switzerland and you see a different story – a central bank that remains in a holding pattern with its policy rate at zero percent;

• Headline inflation remains close to the lower end of the Swiss National Bank’s 0–2 percent price stability range, coming in at 0.4 percent in July. The inflationary pressure is almost entirely related to higher petroleum product prices following the war in Iran. Strip these out and inflation is at its lowest level since 2021, just barely above 0 percent. Core inflation – which excludes energy and seasonal prices – sits at a less dire 0.3 percent in July. It has remained at that level for four consecutive months, suggesting little pass-through from the energy shock into broader inflation so far;

• Looking ahead, Swiss inflation is poised to tick higher over the coming months, driven partly by franc weakness. Imports account for nearly a quarter of Switzerland's CPI basket, so the exchange rate has a broad impact on prices. The IMF indicates that every one percent drop in the franc adds roughly 0.12 percentage points to headline CPI over a twelve-month period;

• The earlier mentioned five percent decline in the franc is an overdramatization. The broad franc’s year-over-year decline is less than 0.5 percent. But it has fallen two percent relative to its average level in the first half of 2026. That would be associated with quarter percentage point increase in headline inflation in the first half of 2027, which could, of course, increase if the franc continues to weaken. However, there is space for such an increase in inflation. The SNB doesn’t need to narrow its interest differential with the ECB and FOMC to ease pressure;

• Although additional technical and economic factors are also set to add to price pressures, I do not expect the combination to be forceful enough to nudge the Swiss National Bank off its holding pattern over at least the next three meetings. Granted, there is a scenario where a combination of a persistent energy shock, resurgent growth and continued franc weakness could trigger an SNB rate hike in the summer of 2027. However, my baseline scenario remains that the central bank will hold rates steady at zero percent for the next 12 months. With inflation having ample room to rise, the SNB will be reluctant to hike prematurely and risk having to bring rates back down harder – given the high uncertainty in its outlook;

• SARON swaps show that punters have different expectations for the SNB. While a rate hike by year-end is virtually off the table at just 5 bps priced in, the pricing for the March 2027 meeting leans towards a move. By then 15bps of hikes are priced in – up 8bps over the past week amid rising energy prices. I see this move as an overreaction and expect no hike by then;

• Shifting to some broader market commentary, US Treasury yields are holding near yesterday’s highs, while Brent crude is trading sideways at $95 a barrel. Dutch natural gas prices are also holding near their highs. In FX, USDJPY has slipped back below 160 after breaking above the handle this morning. The Stoxx 50 is down just under half a percent, while S&P 500 futures are down a quarter of a percent;

• Later this afternoon, we get to look forward to the Bank of Canada’s interest rate decision – consensus is a hold. In the evening the Fed is set to release its latest Beige Book.

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