Is the CHF reaching its full potential as a safe haven?

Buyers of the Swiss franc should stay alert. The risk of intervention by the Swiss National Bank (SNB) is rising — even if it causes diplomatic tension.

Amid capital outflows from U.S. assets and uncertainty around tariffs, the franc has become a preferred “safe haven.” Deutsche Bank’s trade-weighted franc index hit a new record last week, highlighting how strong the currency has become — and how uncomfortable that is for central bankers, who see it as a brake on economic growth.

This strength also suppresses inflation at a time when the SNB is already pursuing an accommodative monetary policy. Markets have fully priced in a 25-basis-point rate cut in June, which would bring the interest rate to zero, and are giving a 20% probability of an even deeper cut.

Two-year yields on Swiss government bonds have dipped back into negative territory for the first time since 2022, as investors prepare for a possible return to negative interest rates.

The SNB has two weapons against the chronically strong franc: negative interest rates and currency interventions. Among interbank traders, the idea is gaining traction that the central bank won’t remain passive much longer and will begin large-scale franc selling.

The central bank may adopt a more patient strategy — intervening with small volumes to cap new highs in the franc without triggering sharp spot market moves. This could lead some participants who continue to bet on franc appreciation to reconsider their positions, especially if de-dollarization narratives remain in play.

Institutional investors are unlikely to be rattled by short-term moves, as currency interventions are rarely effective in the long run unless accompanied by corresponding shifts in monetary policy. But the situation is different for so-called “fast money” — which may soon start looking for alternative havens.

Betting against the franc versus the yen may be the first choice, as the cross hit its highest level since the U.S. elections in November. The evolving role of the euro in global portfolios may also mean EUR/CHF starts to recover its losses. That might explain why more than three out of four vanilla options processed by the Depository Trust & Clearing Corporation this month are betting on euro strength.

One thing is certain: time is running out for the SNB. Staying on the sidelines may no longer be an option — and while policymakers remain silent for now, they are certainly watching the situation. And even if a slap on the wrist from Washington comes over currency manipulation, it’s unlikely to stop them if the franc keeps climbing.