SNB Being Adaptive, But Not Proactive; CHF Implications - BofA Merrill

Growth looks a little better, inflation remains very weak

The Swiss economy is trundling along. GDP growth was better than expected in 4Q (0.4% qoq), with relatively decent domestic demand developments. Inflation dynamics, meanwhile, remain poor, with consumer inflation excl petroleum products at -1% yoy in January following 4Q's 0.8% yoy average.

SNB is about limiting additional FX damage

SNB policy, meanwhile, is not so much driven by what's going on in the economy itself at the moment. The growth damage from the sharp CHF appreciation was SNB-inflicted, the deterioration in inflation dynamics, too. We argued before that the economy would need a sharp FX depreciation to improve more quickly - the exact medication the SNB cannot deliver. Hence, the SNB's job is now limited to avoid additional damage, doing its best to avoid exchange rate appreciation.

No policy change needed to cope with pressure

To keep it short, we think the SNB will refrain from acting against potential future CHF appreciation proactively. The exchange rate is currently relatively stable. EUR/CHF has come off its more comfortable but short-lived 1.11 levels from early February, but remains close to 1.09 levels, around which it wobbled since September.

Even if such appreciation materialises, we would expect FX interventions to be the first and preferred tool of defense. Absent a significant surprise cut in the ECB's depo rate beyond our expectations (of 10bp max), the SNB is therefore likely to keep its policy unchanged on 17 March.

CHF Implications: Watch European Bank Stocks

The reaction of European bank stocks to the ECB decision could be the key driver for CHF. However, based on our economists' base case scenario of a modest 10bps deposit rate cut, we doubt that this will lead to any significant appreciative pressures on CHF. Indeed, given the risks of disappointment from the ECB, the risks are that EUR/CHF actually pops higher on the announcement. In the absence of any meaningful drag on European banks and with the global market backdrop more conducive to risk on, EUR/CHF may therefore struggle to make a sustained break below the 1.0810 lows.

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