Research Team at Danske Bank, suggests that the data out of Switzerland have made a clear turn for the better over the past month as notably CPI, GDP and employment growth alike surprised on the upside.
Key Quotes
“Moreover, forward-looking indicators such as the KOF index and manufacturing PMI are pointing to a more upbeat outlook than has the case for most of the past year.
Monetary policy. The SNB remains in ‘wait-and-see’ mode with a view to the ECB’s next move as focus in Switzerland remains on bringing EUR/CHF further away from overvalued territory. The subdued move on rates from the ECB in March was relief for the SNB as the latter was freed from the task of experimenting with rates below the -0.75% level and/or imposing the current negative deposit rates on a larger number of accounts (also known as the ‘nuclear option’).
Should CHF strengthen from here, as a first line of defence intervention will likely be the preferred option for SNB. We expect the SNB to keep both the Libor target midpoint and the
sight-deposit rate at -0.75% for the foreseeable future.
Flows. Positioning remains broadly neutral on CHF and is less stretched on EUR shorts than at the start of the year.
Risks. In the event of a Brexit, EUR/CHF would most likely move lower, testing the SNB commitment to prevent sustained CHF appreciation.
With the ECB moving away from the exchange/interest rate channel for easing policy, the long-standing pressure on the SNB from EUR weakness is fading. EUR/CHF has moved to levels where the SNB is more comfortable that the Swiss export industry is able to cope and recent communication from the SNB suggests that the central bank is less determined to bring about outright CHF weakness, and thus willing to accept EUR/CHF staying at these levels for now. Unless EUR/CHF takes a significant dive, we think SNB will stay put for now.
Ahead of the UK’s EU referendum EUR/CHF may see a move lower on Brexit fears and we still target 1.08 in 3M. Longer term, we continue to expect fundamentals to support a higher EUR/CHF, with a short-lived relief rally towards 1.12 in 6M (prev. 1.11) as the UK stays in the EU, followed by a move to 1.15 in 12M (unchanged.)”
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