The Swiss franc remains a fundamentally bearish currency due to interest rates of -0.75% and inflation falling further into negative territory. As always the SNB’s focus is the exchange rate with the euro and President Jordan has routinely used speaking opportunities to state that the franc is overvalued.
Both the USDCHF and EURCHF exchange rates rallied nearly 400 pips during the first month of 2016. This is partly attributable to dollar and euro strength across the board – whereby the dollar has been boosted by policy fundamentals and the euro by risk-off sentiment – but the the moves are also due to franc weakness as some commentators see the prospect of further easing by the SNB as a more likely option since the January 21 ECB meeting where Draghi indicated further expansion of the Eurozone’s QE program.
Further easing by the ECB is likely to put pressure on the euro and hence weaken the EURCHF, which is the SNB’s primary concern as it makes Swiss exports to Europe less competitive. If the ECB eases further and the EURCHF declines, then the SNB may consider their own easing program or a move further into negative rates or to widen the scope of the current negative rate application.
President Jordan has routinely used speaking opportunities to state that the franc is overvalued
Although the SNB may be forced to take this action to buoy the EURCHF exchange rate, and boost inflation, in the future, recent franc weakness means they are not currently in an urgent position to act, since the EURCHF is at the highest level since the removal of the floor on January 15, 2015.
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On December 10, the SNB’s Q4 Monetary Policy Assessment saw no change in the -1.25% to -0.25% target corridor for 3-month CHF Libor. The deposit rate was also left unchanged at -0.75%. Heading into the release there was some speculation that the SNB would further cut rates, or add to their current program in response to recent ECB actions. However, while the ECB extended their current program, and cut the deposit rate by 10 basis points, the SNB stopped short of expanding their current asset purchase program. This less aggressive approach by the ECB allowed the SNB to hold policy steady, however further easing by the ECB this year may encourage the SNB to follow suit.
The Consumer Price Index for January saw prices fall -1.3% compared to a year ago and a further -0.4% for the month. With m/m readings heading further into deflation, the SNB may need to act to try to boost inflation.
Third quarter GDP, released December 1, was stagnant at 0%, and 0.80% since a year prior, held back by weak performance in the energy, construction and financial sector.
Retail sales for November, released January 11, saw declines of -2.1% y/y – the worst reading in eight months – while PPI for December, released January 19, declined -0.4% for the month. These lacklustre figures paint a weakening picture for the Swiss economy and have contributed to the franc depreciation seen throughout the first month of 2016.
The franc is likely to remain under pressure as long as the Swiss economy has deflation and low economic growth. The currency can however rally on safe-haven flows. The market will be looking out for any further easing of monetary policy by the SNB throughout the coming months.