SNB decided “no change”, today, keeping the status quo stance, leaving the target rate unchanged at 0-0.25%, and promising to “continue to enforce the minimum exchange rate with the utmost determination.”The SNB has been away from the market for more than a year now, with the FX reserves unchanged basically since Draghi said “whatever it takes” in July 2012.
Figure 1. Stably high
CHF is still one of the most expensive currencies in the G10 universe. The real effective CHF exchange rate is high relative to the historic mean (6% to 10% overvalued, depending on whether one adjusts for the trend since 70s or not). While most other currencies, which strengthened against EUR during the crisis have corrected lower over the past year, the CHF is still more than 17% stronger against EUR than it was just before the EMU crisis sparked off early 2010.
Figure 2. Still too strong
Why has the CHF not weakened yet? Financial flows. While the net FDI outflows have continued undisturbed after Lehman, the net portfolio outflows have stopped. But the latest data show that the trend may resume: final quarter of 2013 showed a 16bn net outflow, largest since 2009. This is due to continuously low volatility, further normalization in the EMU and global economy, supporting financial outflows from Switzerland.
Figure 3. Let it flow
Should SNB drop EURCHF floor? Not yet. The recent data has been on the soft side, with manufacturing PMIs falling from 57.6 in January to 52.54 in May, the M3 growth slowing from 11.3% y/y a year ago to 8% y/y now, and mortgage claims growing 4.2 % y/y, down from 5.6% last year. Inflation is still very low (0.2% y/y in May), undermined by imported deflation (-0.5% y/y). SNB said today “there are no signs of any inflation risks in Switzerland in the foreseeable future. “, lowering own forecasts by 0.1% over the horizon. In addition, the policy easing from ECB keeps SNB motivated to stand ready to act, should the negative EUR rate would encourage outflow from the euro zone.
Alternative for the SNB should the market pressure for strengthening increase, are following ECB suite and cutting the target 3M Libor rate below zero or imposing a negative interest rate on sight deposits, something that IMF suggested and SNB members hinted earlier. But the hurdle for this action is rather high, as the SNB does not want to fuel the housing market. Even if the SNB takes this step, it will likely be a minimal rate cut (10-15bp), and will come with macroprudential measures to tame the housing market (higher countercyclical buffer for banks, effective June 2014). First, and most of the defence from the SNB will still most likely come through intervention in the exchange rate market.
What to do with CHF? Our best guess is the SNB will keep the EURCHF floor (1.20) at least until 2016. We recommend positioning for a weaker CHF with a horizon of at least 3M. Real interest rate spread justifies a much higher EURCHF – above 1.30. However, in the short term the EURCHF could come under pressure, driven by the USDCHF. With the dovish Fed, the USDCHF took a dip below the 200D MA. Mind the gap between the EURCHF and USDCHF since May – a similar one earlier this year didn’t last.
Figure 4. CHF should be weaker
Figure 5. But USDCHF under pressure…
Figure 6. Mind the gap
Nordea