CHF: Intervention threat – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that the SNB maintained steady policy at this morning’s meeting and this policy included a threat to intervene in the FX market.

Key Quotes

“According to the OECD’s measure of purchasing power parity, the CHF is currently 20% overvalued vs. the USD and 41% overvalued vs the EUR.”

“On the back of strong fundamentals, which include a current account and a budget surplus, the CHF is a favoured safe haven currency.   This status has meant that bouts of CHF strength are usually a function of a weak sentiment elsewhere.   As a consequence, the SNB’s hugely accommodative policy tends to have more leverage in times when broad-based risk appetite is strong.”

“Several countries in the EU are facing unease stemming from immigration policies and EMU may yet be rocked by Italy’s budget demands.”

“Layered on top of this is the guidance from the ECB that interest rates are set to remain on hold at least until summer 2019.   Against the backdrop, the value of EUR/CHF has dropped over 4% from the April high and safe haven flows have edged back into the CHF.”

“In his speech this morning, SNB President Jordon remarked that “in light of political uncertainty in Italy, we have since seen countermovement, particularly against to the euro. The situation on the foreign exchange market thus remains fragile, and the negative interest rate and our willingness to intervene in the foreign exchange market as necessary therefore remain essential. These measures keep the attractiveness of Swiss franc investments low and ease pressure on the currency.”

“In short, the SNB has reinforced its uber-dovish policy credentials and the market is likely to retain the view that the SNB could be the last G10 central banks to move away from extraordinary policy measures.”

“For 2019, the SNB continues to expect CPI inflation at just 0.9% y/y rising to a downgraded estimate of 1.6% y/y in 2020.   The changes in these forecasts are not significant enough to alter the prevailing position of Swiss monetary policy settings or the outlook for the CHF.”

“In view of the risks associated with Eurozone fundamentals we have revised our end of year forecasts for EUR/CHF to 1.16 from 1.18 with downside risk.”