SNB policy unchanged but may have to relax the pace of intervention

The SNB kept its policy unchanged with an interest rate of -0.75%, and further FX intervention if necessary.


The SNB slightly lowered its inflation forecast for 2017 and 2018, which seems conservative considering the recent moves higher on commodities, inflation expectations around the world.

Going forward the SNB will continue to depend on the ECB and the European economic and political developments, as long as it wants to maintain some control over the EUR/CHF rate. Last week, The ECB pledged to extend its QE program at least till end of 2017, during which it will purchase 780 billion worth of assets. Given the heavy political calendar ahead with French and German elections, governments will have limited flexibility, and the ECB should remain accommodative. Rising bond yields due to heightened inflation expectation is helping troubled European banks increase their lending activity, which should further exert pressure on the common currency.

Hence a rake hike by the SNB can most certainly be ruled out for 2017. An even lower negative rate is also unlikely considering the pressure it already holds on Swiss banks, pension funds and insurance companies. Thus, the tools available to the SNB are reduced to FX interventions, which consist of printing more francs to purchase foreign assets. With FX reserves of around 100% of yearly GDP, the SNB firepower may become limited over time. We expect the SNB will more carefully pace their level of intervention, by only intervening to prevent extreme volatility. The SNB no longer has a “virtual” floor level in mind, and would probably allow the EUR/CHF rate to drift lower towards 1.05-1.03, for as long as it’s a slow and gradual move.

On the other hand the SNB should be relieved by a weaker franc compared to the US dollar. The IN_USDCHF now back above parity has the potential to continue on raising another 10% along the course of next year. This should be supportive for Swiss companies sourcing revenue in the US. Additionally if the reflation and risk-on environment persists, we should also see higher yielding currencies such as some Asian and EM currencies, outperform the franc. A clear positive for watch exports.

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