On Thursday, the SNB will meet to broadcast their monetary policy strategy. In the light of higher domestic inflation, ECB “normalization” signal and mounting political risk in Europe, this generally sleepy meeting should get additional attention. At the March meeting the SNB held sight deposit rates at -0.75% while reiterating the bank would remain active if necessary in the foreign exchange market. We anticipate a broadly dovish communication, particularly in the light of recent ECB forward guidance. Since the last statement, the CHF has generally appreciated ensuring that the “highly valued” term will remain. In addition, uncertainty in Europe, specifically in Italy will keep the SNB vigilant. We suspect that the near term inflation forecast and growth assessment will remain unchanged despite clear improvements.
Firstly, the SNB will avoid sparking any speculation that might cause CHF to appreciate. Secondly, global growth and macro backdrop are a cause for concerns for the small alpine economy, which will provide plenty of coverage for the SNB. Interestingly, the SNB has expressed concerned over overheating of the housing markets. Even suggesting a need for a price correction. We are uncertain how the SNB will handle this issue.
However, Swiss general economy continues to surprise to the upside. PMI are running above average, while GDP growth is coming off a strong 1Q. We continued to see the SNB as one of the last G10 movers towards normalization. Our call is for the first interest rate hike, is September 2019. This forecasts is based less on the trajectory of Swiss inflation and more the ECB policy path. We anticipate ECB asset purchase will end in 2018 and first rate hike March 2019. This give the SNB six month to judge the markets reaction on Euro before preceding. The significant lag between G10 central banks and the SNB and excellent candidate for global funding currency, suggests that risk rewards trade-off for the EURCHF remains to the upside.
By Peter Rosenstreich
