Swiss Franc Falls as Trump's Tariff Remarks Hit Safe Havens — Market Talk

0931 ET - The Swiss franc could rise against the euro ahead of Donald Trump's inauguration as U.S. President on Jan. 20 and the potential trade tariffs that could mark the occasion, Barclays forex strategist Lefteris Farmakis says in a note. The European Central Bank might have to cut interest rates by more than the market expects given tariff and trade risks to the eurozone economy, he says. The Swiss National Bank is unlikely to take rates back into negative territory and seems hesitant to intervene in the foreign exchange market to stem franc strength, he says. Barclays advises selling EUR/CHF with a target price of 0.92 and stop loss of 0.95. EUR/CHF falls 0.1% to 0.9398.(renae.dyer@wsj.com)

0930 ET - U.S. markets reacted with euphoria to Donald Trump's victory, but that trade has since unwound somewhat. Economist Phil Suttle lays out the glass-half-empty case. The more aggressively Trump pursues policies such as deportations and tariffs, the more sharply the U.S. will fall into a stagflationary funk over the next few years, his outlook suggests. If immigration is cut off and workers deported, the labor force could lose all its growth momentum or even shrink. Add in tariffs and economic growth could stall or even reverse in 2025 and 2026, Suttle estimates. Meanwhile, a worker shortage and tariffs could both drive up prices, potentially pushing inflation back above 3% a year. A more aggressive Trump agenda could worsen those effects, Suttle postulates. (matt.grossman@wsj.com; @mattgrossman)

0853 ET - Treasury yields fall to start a shortened session in honor of former president Carter. Trade is set to close at 2 p.m. ET in the U.S. and stock markets are closed. There are no major data points today, as the jobless claims report was released yesterday, showing layoffs still contained. December payrolls will be released tomorrow. Inflation concerns are growing, which could limit interest rate cuts by the Fed. The 10-year trades at 4.649% and the two-year at 4.261%. (paulo.trevisani@wsj.com; @ptrevisani)

0756 ET - Sterling and U.K. government bonds could fall further unless there's an improvement in investor confidence for buying the nation's high level of debt, abrdn's Matthew Amis says in a note. U.K. finance minister Rachel Reeves's fiscal headroom has been eroded as gilt yields rose into year-end. Reeves could signal greater cuts to government spending in the Spring budget in March, Amis says. (renae.dyer@wsj.com)

0750 ET - Weakness in sterling and the gilt market feels like an inevitable consequence of a badly-received budget, says Abrdn's Matthew Amis in a note. Jeremy Hunt started the trend of leaving very little fiscal headroom and Rachel Reeves continued that trend in October's budget, the investment manager says. "As gilt yields rose into year-end (admittedly mostly driven by news from the U.S.), the limited fiscal headroom has been eroded." Abrdn expects that Finance Minister Rachel Reeves will have broken her own newly drafted fiscal rules when the Office for Budget Responsability present their updated forecasts at the end of March. (emese.bartha@wsj.com)

0745 ET - Sovereign bond yields have risen across the globe as investors demand a higher term premium ahead of U.S. President-elect Donald Trump's inauguration, but U.K. markets have been especially badly hit, says Handelsbanken's Daniel Mahoney. "Both sterling/dollar and sterling/euro exchange rates have depreciated," the U.K. economist says in a note. "And, while ten-year German and French government bond yields have risen by just over 10 basis points since the beginning of this week, U.K. ten-year gilt yields have jumped by over 20 basis points." Thirty-year gilt yields led the rise, hitting 5.455% on Thursday, a level unseen since 1998, according to Tradeweb. (emese.bartha@wsj.com)

0743 ET - Canada's housing market saw a mixed finish to 2024, with the strong fall market rally losing a lot of steam as resale transactions fell markedly in Calgary and Toronto between November and December. Royal Bank of Canada's Robert Hogue notes the drop in Toronto rolled back all advances made since September, though the soft patch wasn't seen across the country and a recovery is still on track in British Columbia's Vancouver and Fraser Valley and transactions remain near all-time highs in Edmonton, Alberta, despite edging lower in December. The economist believe further interest rate cuts by the Bank of Canada will stimulate homebuyer demand in 2025, which will keep the rally going in most markets even if strained affordability and federal cuts to immigration restrain the pace. (robb.stewart@wsj.com)

0737 ET - The current increase in U.K. government borrowing costs has considerable implications for the U.K.'s fiscal targets, which the U.K. Treasury chief Rachel Reeves has said are a key priority, Handelsbanken's Daniel Mahoney says in a note. In the October budget, the Office for Budget Responsibility assumed 10-year gilt yields would be around 3.9%, but they are currently approaching 100 basis points higher, the U.K. economist says. Handelsbanken calculates that if gilt yields are sustained at these levels, Reeves's headroom for fiscal targets will have been "completely removed." This raises the prospect of further fiscal consolidation, tax rises, spending reductions or borrowing to be required over the course of this year, Mahoney says. Ten-year gilt yields last trade at 4.809%, Tradeweb data show.(emese.bartha@wsj.com)

0733 ET - U.K. government bonds, or gilts, need international buyers who are price-sensitive, and on this they will need to compete with U.S. Treasurys which are tough competition, UBS strategists say in a note. Gilt supply will be "very heavy" in the first quarter even by last year's standards, they say. "Prices will balance the market at some level, of course, but we are not sure we're there." The yield on 30-year gilts hit successive levels unseen since 1998, rising to 5.455% early Thursday before easing back to last trade at 5.381%, according to Tradeweb. (emese.bartha@wsj.com)

0727 ET - German industrial output rose solidly in November, with fourth-quarter output looking much better than feared a few months ago, Pantheon Macroeconomics' Claus Vistesen says in a note. Production rose 1.5% on month. The result was helped by energy output that jumped 5.6%, rebounding from big decline at the start of the fourth quarter, but core manufacturing performed strongly too, Vistesen says. Survey data, however, remains uniformly poor, so production should expect a dip in December, he notes. However, combined with a likely rise in 4Q retail sales, and separate data showing a surging rebound in the November trade surplus, the outlook for German economic growth in the final quarter of 2024 suddenly looks a bit better, he argues. (edward.frankl@wsj.com)

0724 ET - Sterling's current decline is unlikely to last as markets should soon unwind this kneejerk reaction to the selloff in U.K. government bonds, Monex Europe currency analyst Nick Rees says. Sterling should recover in the next week or so, he says. Following this, sterling could see some renewed weakness alongside other non-dollar G-10 currencies on concerns about U.S. tariffs after Donald Trump's January 20 presidential inauguration but longer-term fundamentals look positive for the currency, he says. "We think growth and interest rate differentials favor sterling upside versus other European currencies, as does the U.K.'s relative insulation from tariffs given its services heavy export mix." Monex expects sterling to rise to $1.30 by year-end. Sterling falls to a 14-month low of $1.2239. (renae.dyer@wsj.com)

0719 ET - The rise in U.K. government bond yields and fall in sterling looks largely driven by markets preparing for Donald Trump's January 20 inauguration as U.S. President, Monex Europe currency analyst Nick Rees says. "Higher Treasury yields are driving other developed market government bonds lower, while a stronger dollar is depressing the valuations of other currencies on a relative basis," he says. However, sterling does stand out for the size of the recent decline. This could reflect wider concerns about U.K. government credibility, although this is more likely just an overreaction to gilts hitting key technical levels that were last associated with the bond market turmoil under former Prime Minister Liz Truss, he says. (renae.dyer@wsj.com)

By Ed Frankl and Joshua Kirby

Switzerland's central bank cut its key interest rate for a fourth straight meeting Thursday, seeking to rein in its strengthening currency and protect its exporters amid high levels of uncertainty about the future of global trade.

The Swiss National Bank cut the rate to 0.5% from 1%, matching the half-point move announced by Canada's central bank Wednesday. Most investors expect the European Central Bank to announce a quarter-point cut later Thursday.

The SNB signaled in its previous meeting that further reductions to the key rate were likely, having cut rates by 25 basis points in the three quarterly meetings since March.

The Swiss franc weakened versus the euro shortly after the rate decision, having appreciated over the last six months as the ECB's rate cuts gathered pace.

The bank also trimmed its inflation and growth expectations for 2025. Switzerland's inflation rate has come in below the SNB's forecasts in recent months to reach its lowest level since June 2021 in October. However, it has remained within the SNB's target of 0%-2%.

But the appreciation of the franc, which makes Swiss exports more expensive and imports cheaper, could be of greater concern ahead for the SNB and its new chairman Martin Schlegel.

"The forecast for Switzerland, as for the global economy, is subject to significant uncertainty. Developments abroad represent the main risk," the SNB said in its statement accompanying the rate decision.

"In particular, the future course of economic policy in the U.S. is still uncertain," it added.

The franc is seen as a safe haven by investors at a time when there is great uncertainty about the future of the international trading system during the U.S. presidency of Donald Trump, and tensions in the Middle East.

Lowering interest rates is one way of reducing that appeal, but the SNB might not have much more room to maneuver, although Schlegel also said in November that negative interest rates weren't excluded from the SNB's toolbox.

That was a policy the central bank adopted between 2014 and 2022, when the bank tried to cool investor demand for the currency. Markets expect rates to reach near zero next year.

In addition to lowering borrowing costs well below levels seen in most other rich countries, the central bank has the option of buying the euro and other foreign currencies to keep a lid on the franc, as it has done in the past. The SNB spent more than 21 billion francs on purchasing foreign currencies in 2021.

The bank on Thursday reiterated its willingness to "be active" in foreign exchange markets.

But interventions in the currency market might come at a cost, and attract the attention of a new U.S. administration that is highly sensitive to perceived signs of unfairness in its trade with other countries.

The first Trump administration named Switzerland a currency manipulator in late 2020, threatening punitive actions. It was taken off the list only in 2023.

The country depends heavily on exports including pharmaceuticals, watches and machinery, with many goods going to the U.S. Higher tariffs could knock the country's economic recovery, UBS economist Alessandro Bee said in an interview ahead of the rate decision.

"Our forecasts currently are for the Swiss economy to go back to trend growth next year on the back of a recovery in manufacturing," Bee said. "If that recovery does not materialize because of a more challenging international environment, this would also lead to slower growth for the entire Swiss economy."

Among the Swiss goods that could be at risk from higher barriers are the country's iconic watches. Shares in Zurich-listed watchmakers Richemont and Swatch Group surged following the SNB's decision.

Americans are the most enthusiastic buyers of Swiss timepieces--which include Rolex, Omega, Tissot and Tag Heuer--spending more than four and a half billion U.S. dollars on them last year.

"By definition, any increase of customs duties or taxes has a negative impact on consumption, and therefore on the entire value chain," the Federation of the Swiss Watch Industry said.

Still, "Switzerland is conveniently not in the line of fire of the import tariffs potential risk," said Luca Solca, a luxury-goods analyst at brokerage Bernstein.

Switzerland's relatively low surplus in its goods trade with the U.S. should help mollify the new government, Solca said. That surplus was $22 billion last year, compared with a U.S. deficit of $279 billion with China or $70 billion with Germany.

The impact will depend ultimately on implementation, but if steeper import duties were implemented, that would drive up the price of Swiss exports goods in the U.S., UBS's Bee said. A hit to neighboring eurozone countries from the same policy would act as a drag on Switzerland too, he added.

Write to Ed Frankl at edward.frankl@wsj.com and Joshua Kirby at joshua.kirby@wsj.com