The main driver of CHF continues to be the extent to which SNB seems prepared to resist external developments (such as a new round of ECB easing and safe haven pressures). SNB should be willing and able to intervene against both these risks, which will keep EURCHF on a gradually rising trend from its current 1.10 level.
SNB should be able to successfully respond to the ECB with just FX interventions. The ECB meeting is on 12 March and the SNB meeting is on 17 March. With the rates market pricing 12bp cuts for both ECB and SNB by March , we cannot exclude some risk of a dip in EURCHF if ECB cuts but SNB does not. Yet under the base scenario we outline above for the ECB, SNB ought to be able to handle a mild disappointment reaction after its own meeting using large FX interventions alone rather than needing to cut interest rates by 25bp to -1.00%. We expect SNB to intervene in large size to ensure EURCHF does not fall during at least the fortnight before and after the meeting. Moreover we see only a limited risk of a painful positioning washout in CHF after the SNB meeting, which we believe SNB should be able to handle. Speculative net CHF shorts are now only net 15% short CHF rather than the net 55% short CHF, as was the case ahead of the December ECB meeting.
SNB would be prepared cut if EURCHF were to fall heavily to around 1.05. If indeed the ECB does somehow over-deliver with a policy surprise that implies sustained downside pressures on EURCHF over the long term (such as credit/equity purchases), we believe SNB would not hesitate to cut by 25bp – possibly even ahead of its scheduled meeting on 17 March. As we have argued previously, we think SNB can still cut further beyond -0.75% if it wants to, and Governor Jordan has recently said this too. Yet outside of such a scenario, the SNB may see the BoJ, ECB and even Riksbank as recent examples of how further rate cuts appear to be losing their ability to generate continuous depreciation at times when monetary policy is converging throughout the world. With interest rates still already deeply negative, we believe SNB would prefer not to use another ‘rate cut ammunition’ when heavy FX purchases are able to deliver a similar result instead.
Costs of interest rate cuts and tougher negative rate exemption rules may outweigh short-term benefits. The example of the BoJ suggests the market may now interpret the net effect of further negative interest rates as a force that compresses bank margins without truly generating sustained FX depreciation. We think this is a relevant argument the SNB will be conscious of in a financial-orientated economy like Switzerland. Moreover, other measures such as changing exemption thresholds are unlikely to impact the currency materially or quickly – and thereby are unlikely to be a solution that SNB chooses in March. While at the margin tougher exemption limits to negative rate rules may encourage some further portfolio outflows over time, SNB knows such rules are unlikely to yield a material FX effect promptly. SNB also still ought to be somewhat cautious against discriminating against particular institution types through explicitly differentiated rules too (e.g., foreign banks). As a result of this, any changes to exemptions that affect all institutions would cause further pain to pension funds and sectors that are already uncomfortable with negative rates. We think SNB would want to avoid this.
We revise our EURCHF forecast from 1.09 to 1.13 in 3 months, and from 1.12 to 1.15 in 12 months (spot 1.10).
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