CHF soars as the SNB scraps the exchange rate floor vs. EUR and lowers the interest rate on sight deposit account balances by 50bp to -0.75%. High policy uncertainty and exchange volatility going forward. CHF to re-weaken.
Just a month ago, the SNB confirmed its determination to enforce the minimum exchange rate “with the utmost determination.” And now it’s gone and the CHF strengthened massively. According to the SNB, the CHF overvaluation has decreased and the economy has adjusted to the new situation, so that enforcing the floor is no longer justified.
We don’t really buy that. The SNB is rather reacting to comments from the ECB – that the big bazooka sovereign QE is coming. This is in line with their recent comments that the exchange rate floor will be difficult to defend against ECB QE.
The overvaluation has been corrected? Not exactly true, as the real effective exchange rate has been trending up while the SNB has been revising inflation down for many meetings now. Giving up on inflation target? With the cut in rates, the EURCHF ”fair value” is closer to 1.30 than to parity. We think the CHF will re-weaken and settle above 1.20, especially if the ECB disappoints on the QE next week (sovereign QE is widely expected).
Now the Swiss economy has to adjust to increased policy uncertainty and exchange rate volatility. Inflation is negative already (-0.3% y/y in December) and exchange uncertainty could weigh on investment spending even if the CHF weakens going forward.
The SNB notes that it “will remain active in the foreign exchange market to influence monetary conditions” – ie intervene. We wouldn’t exclude the possibility that the SNB will introduce a new floor at some point in the future.