In a surprise move Switzerland consumer price inflation rose higher then forecasts. The move will certain triggers speculation of quicker normalization of extreme policy. Swiss May CPI came in at 0.4% m/m vs. 0.3% m/m exp (1.0% y/y vs. 0.9% y/y) while core CPI climbed 0.1% m/m and 0.4% y/y. The higher read was spread around underlying components indicating a continue of strong trend since Feb 2016. Yet simple projections have inflation reaching the SNB target around late 2019, so the central banks is unlikely to panic when it see these numbers. Call to push forward the tightening cycle is likely to fall on deaf ears. With political risk rising in Europe resulting into a stronger CHF, the SNB will stay steadfast in current defensive policy mix. In fact at 21st June rate decision we will likely hear further commitment by the SNB to weaken “overvalued” CHF, rather than acknowledging inflations pressures.
The SNB has played a dangerous game with extreme policy actions, unwinding these actions will come with significant certainties. Even subtle changes in languages could be the catalyst to reloading CHF long by investors who have long abandoned the currency due to high carry costs. EURCHF was higher on the news as trades remain focused on the short term positive news out of Italy over the long play of SNB policy.
By Peter Rosenstreich