Only words, no action, as expected. CHF clearly overvalued.
As expected, the SNB did not change the target range for the tree-month Libor (0 to 0.25%), left the exchange rate floor untouched at EURCHF 1.20 and reiterated its commitment to enforce the floor “with utmost determination”.
Given the franc’s strength and reading the SNB’s monetary policy assessment, one actually wonders why they did not act. The SNB notes that
- “The economic outlook has deteriorated considerably.”
- “For Switzerland, the risk of deflation has (…) increased again.”
- “Production capacity will (…) remain underutilised for longer than previously assumed.”
Growth expectations for this year were scaled down to “just below 1.5%”, from “around 2%” in June. Even that requires growth to pick up in Q3 and Q4. As usual, the SNB did not mention expectations for next year.
The SNB’s conditional inflation forecast was unchanged (0.1% y/y) for this year, but lowered for 2015 (0.2% from 0.3%) and even more so for 2016 (0.5% from 0.9%).
At this point, the SNB wanted to keep its powder dry. Another reason for SNB inaction probably is that FX interventions are the preferred instrument to weaken the CHF if needed. And the SNB might consider the cost associated with a negative deposit rate as higher than the benefit. In our forecast horizon, we expect no rate hikes or cuts and no change to the currency floor through to end-2016.
CHF clearly overvalued
We stick to the view, that CHF is one of the most overvalued currencies in G10 and should weaken further. The SNB hasn’t intervened so far, and it seems the markets respect the floor. The SNB can afford to intervene, because the domestic money supply and housing market have slowed down this year. The USDCHF has been favoured lately, but it may now be time for CHF to weaken further against EUR and GBP.
Nordea