Market Analysis

SNB: Going Steady

Switzerland’s economy grew 0.3 per cent year-on-year in the second quarter of 2017, its slowest annual rate since late 2009.  Additionally, as Japan’s Nomura Bank wrote last week, the latest Swiss inflation data for June CPI showed a pick-up to “0.46 per cent year-on-year, mostly due to housing, energy and transport, sectors that typically are led by rising import costs via the exchange rate function. With 47 per cent of the CPI basket currently experiencing deflation, it is clearly too early to say Swiss inflation is definitely heading higher.” It therefore made sense for the Swiss National Bank (SNB) to stick today to its ultra-loose monetary policy, especially given the SNB’s continuing focus on the value of the Swiss franc (EURCHF).  Commenting on the franc’s weaker drift last month, SNB governing board member Andrea Maschler said then that “overall the trends are pointing in the right direction for the Swiss franc but it is too early to say whether these trends are sustainable. The situation remains relatively fragile.”Today’s SNB statement made the point that while a recent move down of the CHF versus the EUR recently had helped “to reduce, to some extent, the significant overvaluation of the [franc]” it is still the case that “the Swiss franc remains highly valued and the situation on the foreign exchnage market is still fragile.”

Traders might wish to note the repetition of the word fragile. Of course, geopolitical considerations, over which the SNB has no control, will always exercise an influence on the Swiss franc given its established status as a safe haven currency but, in the case of EURCHF, traders  also have to bear in mind how ECB policy affects the currency pair. With the ECB now waiting until October to unveil its plans on tapering asset purchases, the SNB’s room for manoeuvre was anyway constrained. The SNB may well want to see the ECB set the pace on monetary policy adjustment in the hope that it supports a higher value for the EURCHF exchange rate. Traders will have their own views but Nomura thinks that the tendency for the franc to weaken versus the euro may persist and sees EURCHF at 1.20 next year

Written by Neal Kimberley, External Currency Analyst.