Friday, November 20, 2015

CHF: Lining up for another SNB rate cut – SocGen

FXStreet (Delhi) – Research Team at Societe Generale, suggests that the SNB next meets on 10 December, one week after the ECB and it may choose to cut interest rates, renew its commitment to FX intervention, or buy more non-Franc securities, including equities.

Key Quotes

“Eleven months ago, the SNB pre-empted the launch of the ECB’s expanded asset purchase programme by cutting interest rates into negative territory. In one month’s time, on 10 December and only one week after the next ECB meeting of 3 December, money markets expect the SNB to cut interest rates again to -1.00%. The largest increase in SNB FX reserves in October since July suggests the central bank is anticipating further ECB action and has already stepped up currency intervention to counter EUR/CHF depreciation below 1.0750.”

“The franc is still markedly overvalued – around 11% in real terms – so there is a case for the SNB to leave its monetary policy as accommodative as it is and hope for a rebound in the EUR to bring back the franc closer to fair value in order to lift inflation. However, a litany of ECB speakers over the past few weeks have made it clear that there is a game plan to ease policy even further in the euro area as a result of persisting low inflation, concerns over a deanchoring of inflation expectations and headwinds to euro area economic growth from the slowdown in emerging markets.”

“In order to maintain the same rate differential with the ECB and curb the attractiveness of the CHF vs the EUR, the SNB simply has no other option but to cut interest rates again in December, provided the ECB also does so the week before. By how much the SNB will move
is uncertain. Money markets are currently pricing in a 25bp reduction to -1.00%, while Euroswiss June 2016 futures are pricing in even more (ESM6: -1.12%).”

“The return of EUR/CHF below 1.0750 last week, a two-month low, has almost certainly sealed the likelihood of further action by the SNB. The central bank has already stepped up the pace of intervention since October, topping up its FX holdings to CHF550.9bn, a new high.”

“The SNB’s balance sheet (this includes FX reserves, gold, and the reserve positions at the IMF), has already ballooned this year to CHF619bn (95%of GDP) but this may not be the end of it. Depending of the scale of the ECB’s actions, the SNB may have to push its balance north of 100% of GDP to keep EUR/CHF on a gentle upward trajectory.”
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