SNB Being Adaptive, But Not Proactive; CHF Implications Growth looks a little better, inflation remains very weak

The Swiss economy is trundling along. GDP growth was better than expected in 4Q (0.4% qoq), with relatively decent domestic demand developments. Inflation dynamics, meanwhile, remain poor, with consumer inflation excl petroleum products at -1% yoy in January following 4Q's 0.8% yoy average.

SNB is about limiting additional FX damage

SNB policy, meanwhile, is not so much driven by what's going on in the economy itself at the moment. The growth damage from the sharp CHF appreciation was SNB-inflicted, the deterioration in inflation dynamics, too. We argued before that the economy would need a sharp FX depreciation to improve more quickly - the exact medication the SNB cannot deliver. Hence, the SNB's job is now limited to avoid additional damage, doing its best to avoid exchange rate appreciation.

No policy change needed to cope with pressure

To keep it short, we think the SNB will refrain from acting against potential future CHF appreciation proactively. The exchange rate is currently relatively stable. EUR/CHF has come off its more comfortable but short-lived 1.11 levels from early February, but remains close to 1.09 levels, around which it wobbled since September.

Even if such appreciation materialises, we would expect FX interventions to be the first and preferred tool of defense. Absent a significant surprise cut in the ECB's depo rate beyond our expectations (of 10bp max), the SNB is therefore likely to keep its policy unchanged on 17 March.

CHF Implications: Watch European Bank Stocks

The reaction of European bank stocks to the ECB decision could be the key driver for CHF. However, based on our economists' base case scenario of a modest 10bps deposit rate cut, we doubt that this will lead to any significant appreciative pressures on CHF. Indeed, given the risks of disappointment from the ECB, the risks are that EUR/CHF actually pops higher on the announcement. In the absence of any meaningful drag on European banks and with the global market backdrop more conducive to risk on, EUR/CHF may therefore struggle to make a sustained break below the 1.0810 lows.

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SNB Ready To Act; EUR/CHF Towards Fair Value SNB ready to act:

The SNB has given enough reason to believe that it will fight the CHF strength. The bank hasn’t changed its tone lately. Its latest message is that the CHF is “significantly overvalued”, which we agree with. The inflation forecasts were adjusted lower at the recent meeting (17 March), from -0.5% in 2016 to -0.8%, levels critical enough not to act.

The bank will intervene in the FX market as needed (probably big time if EUR/CHF falls below 1.0750). This time intervention is easier, as housing market momentum has been falling, suggesting extra money supply won’t be a problem at this point. Note, also, the SNB has been rather passive over the past few quarters, so they would not see a big trouble to scale up for a change, if needed.

The long-term PPP models suggest that EUR/CHF is undervalued by over 20%, so there is plenty of room for upside. It thus remains the best funding currency for example for Emerging Market FX long positions. For the short term, a move above 1.12 in EUR/CHF should be aimed for – this is our 3M forecast.

Switzerland UBS consumption indicator March 1.51 vs 1.45 prev Swiss consumption data out for March

• prev revised down from 1.53

USDCHF 0.9743 just off session highs as EURUSD dips to 1.1291 and EURCHF still anchored around 1.1000

The UBS Consumption Indicator is a leading indicator of private consumption trends. This indicator is a combined reading of five indicators, including consumer confidence, consumer spending, tourism, new car sales, and retail activity.

USD/CHF: Dollar Sinks Most in 2-Wk on Data & Safety Hits

The greenback even downperformed against the Swiss franc on Friday, falling to a two-week low amid pressure from the set of weaker-than-expected US updates.

Earlier in the morning, investors monitored the falling momentum of the Federal Reserve's (Fed) inflation gauge, as the PCE price index declined to 0.8% annually in March, following a figure of 1.0% booked a month ago. Moreover, the less-volatile core PCE price index hit 1.6% on an annual basis, a marginal slip from 1.7% seen previously.

In addition, the final release from the University of Michigan (UoM) confidence survey fell to a seven-month low at 89.0 points in April. Business activity in the Chicago area also disappointed with 50.4 points in the same month.

Nevertheless, the USD/CHF pair has been falling since the beginning of this business week, but the drop gained speed after the FOMC meeting as the Fed failed to specify the timing of additional monetary tightening. On the upside, the central bank left the possibility of a hike in June alive, mentioning an improvement of the external environment. But the central bankers pointed out to the recent slowdown in US economic activity. 

In the afternoon, the USD/CHF was trading 0.70% lower at ₣0.9598, dwelling slightly above the lowest point since April 13 at ₣0.9570 reached during the US market hours.

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SNB's Jordan speech due during the European / US time zone Monday

Head honcho at the Swiss National Bank and 2015 FX villain of the year Thomas Jordan is speaking later

• Due at 1630GMT
• Speaking at the Europa Forum

• Jordan is on the record (again and again, and again) saying the Swiss franc is overvalued, so he won't deviate from that message.
• He will also likely reiterate he has tools available (unconventional if needed) to combat the franc strength (negative rates, intervention, for example ... neither of which have worked out too well for him in the fight against an overvalued Swissy)

SNB Ready To Act If EUR/CHF Trades Below 1.08; A Breakout Above 1.10 Due In Q4

The EUR/CHF has been trading in a narrow range for more than a year, and we see good chances for it to finally break above 1.10 in Q4 as inflation picks up globally...

There have been sufficient events and risks over summer and early autumn to strengthen the CHF. But neither the Brexit vote, nor the Deutsche Bank drama managed to make the EUR/CHF end up below the range we have seen since summer 2015. It will probably remain the case, as the US election is even a lesser risk, since distant from Europe, and the SNB is stands ready to act.

SNB In Action:

The SNB has been rumoured to intervene when the EUR/CHF went to 1.0813 at the end of September on Deutsche Bank panic. From the recent sight deposit data, it also seems the interventions have picked up lately. It is clear the SNB is unwilling to EUR/CHF trade below 1.08, the lower end of the range since last year. We have seen them act as the EUR/CHF hit that level during the Brexit panic.

Still about global rates:

The global rates are still a guide for the CHF, and as long as there is a lack of inflation and growth premia, seen in the long rates, there is a lack of motivation to sell the CHF. The CHF remains overvalued against most currencies, and one should rather position for weakening rather than strength in the months ahead. The rise in oil prices lately, on the back of OPEC decision, and with the expectation that the Brent oil will end the year at above USD 50/bbl, the global rates should rise, lifting the EUR/CHF too.

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Switzerland CPI Sept mm +0.1% vs +0.2% exp

Swiss September CPI report 6 Oct

• -0.1% prev
• yy -0.2% vs 0.0% exp vs -0.1% prev
• HICP mm 0.0% vs +0.3% exp vs 0.0%
• yy -0.3% vs 0.0% exp/prev

Swiss Currency Reserves Little Changed For September

The latest data for Swiss foreign currency reserves recorded an increase to CHF628bn for September from a revised CHF627bn the previous month. This was a fresh record higher for the reserves and there has been a net increase from CHF542bn reported in September 2015 and CHF462bn the previous year. The data does not, however, indicate heavy National Bank intervention during the month.

The reserves data is an important indicator as it gives strong indications on the extent of Swiss National Bank (SNB) intervention in the currency markets. When the bank intervenes, the bank sells franc and buys overseas currencies, which increases the levels of reserves.

Caution is needed as the immediate effects can be disguised by swap operations and there are also valuation effects in play as any weakness in the Swiss currency will raise the franc value of reserves.

Even with these caveats, the small increase in reserves for the month suggests that the National Bank did not intervene aggressively to weaken the Swiss currency during September. In this context, this will increase speculation that there has been a weakening of underlying franc demand over the past few weeks.

The SNB will still be on high alert over the situation and will continue to resist currency appreciation in the short term. The latest suspicions of intervention at the end of September would not have shown up in the data.

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SNB’s Jordan weekend comments – will cut rates even further ‘if necessary’

So the GBP gets smashed on Friday and now we are getting comments from Swiss National Bank Governor Jordan

Jordan was speaking with Bloomberg TV on SNB policy (reminder, a negative 0.75% rate and threats to intervene in the CHF ... unless he changes his mind of course :-D ). He said the bank will cut further into negative territory if they have too:

• "We have still some room to go further if necessary. It makes, definitely, sense for Switzerland"
• And on the CHF: "a lot of evidence that the exchange rate channel is working"

Thanks to Bloomberg for the report

And via Reuters, more from Jordan

• Says the SWF remains "significantly overvalued"
• Ratea aren't changing any time soon
• "We are convinced for the time being that our monetary policy is minus 75 basis points"
• "We also said that we have the potential to lower rates if necessary, but for the time being this policy is working and the combination of the two pillars is the right one"
  

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ps. Bloomberg's most recent survey of economists/analysts shows there are plenty thinking rates are headed to negative 1.25% in the hilly country

Switzerland unemployment rate Sept SA 3.3% vs 3.4% exp

Swiss September unemployment rate 10 Oct

• 3.3% prev revised down from 3.4%
• NSA 3.2% as exp/prev

Better than expected SA data but only matching the Auf revision.