US-Iran tensions most untimely for the SNB

The present situation catch up is that Switzerland is squaring off against deflationary pressures once again. While not quite yet reaching deflation territory, the worries are mounting as inflation pressures have fallen off dramatically in the second half of last year. Core prices are still hanging in there but it feels like only a matter of time before the issue becomes bigger than it is now.

And for the SNB, the central bank just does not want to fall back into the rabbit hole of having to start using unconventional monetary policy measures once again. When that sticks, we've seen before how difficult it can be to get out of the rut. The Covid pandemic gave them a get out of jail free card but that has now expired as the deflation era looks set to return.

To compound matters for the Swiss central bank, a stronger franc currency is making the situation even more difficult. That just adds to the deflationary impact and puts the SNB in a tough spot in trying to avoid a return to negative interest rates.

The EUR/CHF is one that is less talked about in the past weeks but is one that is worth taking note of:

The SNB looked to have drawn a line previously when the currency pair hit the 0.92 level but that has given way in late January. And we're seeing the franc continue to nudge higher still with the pair inching towards 0.91 now.

The big question is where does the SNB draw the line next in terms of intervening to limit the franc strength? And how much are they willing to go up against market sentiment?

As such, escalating US-Iran tensions are coming at an unfortunate timing for the central bank. Amid the de-dollarisation narrative and the yen facing its own set of problems back home, the franc is the only game in town for currency traders seeking safe haven.

And that will just put more downside pressure on EUR/CHF, which is already at record lows this week. That in turn will just add more woes to the SNB in trying to manage their inflation mandate. And eventually, having to possibly look to negative rates to also deter further strength in the franc currency alongside dealing with deflation pressures.