The SNB is clearly in a reactive stance rather than taking a proactive strategy
As we had expected, the SNB held its policy rates unchanged (Sight deposit rate -0.75% & 3month Libor -0.25% to -0.75%) while not tinkering with tightening banks threshold exemptions on negative rates.
We suspect, given the SNB depleted tool box, tightening exemption would be the central banks first strike retaliation. We got the standard CHF “significantly overvalued” and “will remain active in the FX markets” rhetoric but expected no less and markets were numb to the threat.
The SNB statement indicated that conditional inflation forecast has be revised downwards as decline in oil prices contributed to a weaker inflation pressures. In what we think is optimistic thinking, inflation is expected to return to positive territory in the coming year.
In regards to the global outlook the SNB stated economic performance as “slightly weaker” as “manufacturing and trade remained sluggish” resulting in the “global economic outlook is somewhat less favorable than in December”. The result was forecasted GDP growth of between 1% to 1.5%. Finally, slowdown in real estate prices momentum has been “confirmed” as mortgages lending slowed reflecting weakness in growths fundamentals.
Unlike past ECB actions which forced the SNB to react, the most recent ECB easing measures is perceived to be near to limits on negative rates. EURCHF has the greatest sensitivity to interest rate differentials, alongside risk appetite. Despite Draghi’s pledge that rates could go lower, the subtle shift from using interest rates verse credit easing signals reliance on further cuts is unlikely.
The subsequent lack of CHF strength indicates that the market was satisfied narrowing of spreads was less likely and pressure on SNB to act decreased. Moving forward the SNB will remain vigilant on CHF and potential capital inflows from Europe either ECB or event inducted (ie Brexit, Grexit, Spanish elections etc).
Barring an event shock we anticipated the EURCHF will continue to trend higher in the near term. EURCHF resistance at 1.10229 remains the primary bullish target. Despite SNB recent Jordon comments suggesting that Swiss monetary policy strategy has limited the appeal of the CHF we suspect that the SNB actually has less control. In addition, deeper negative rates lower band to -1.25% or expansion of balance sheet of 100%+ of GDP has potential destabilizing risks that are hard to model.
We agree with SNB governor board member Andrea Maechler statement that there are limits to central bank effectiveness. And believe the SNB is very close to those limits. Most likely the SNB will target negative interest rate exemption as first strike. For now it’s unlikely the SNB will have to dig into their depleted tool kit, yet given the ECB deteriorating inflation and growth outlook we suspect that additional policy measure will be need. We remain negative on the EURCHF in light of mounting European event risks and steady demand of long term safe haven assets.
Peter Rosenstreich – Head of Market Strategy – Swissquote