The Swiss National Bank (SNB) is widely expected to keep its policy unchanged when it meets on Thursday, at 0730 GMT. Markets will look for hints on whether the Bank is contemplating an eventual exit from its ultra-loose policies. Although Swiss economic data are painting a more colorful picture, it still appears too early for policymakers to signal an exit from negative interest rates. Continued dovish signals would argue for a weaker franc over time, absent any global risk-off developments.
Up until the beginning of May, things were looking rosy for SNB officials. The domestic economy was posting gains, inflation was on a slow but steady uptrend, and the Swiss franc was losing substantial ground against both the dollar and the euro. As a reminder, the SNB pays close attention to the exchange rate. A stronger currency tends to hold back inflation by lowering import prices, and since the franc appreciates in times of turmoil due to its safe-haven status, the Bank has regularly intervened in FX markets to keep the currency weaker.
Even though economic data have remained upbeat – with solid GDP growth in Q1, the unemployment rate reaching a decade-low and inflation touching a seven-year high of 1.0% on an annual basis in May – the franc has also gained substantially against the euro lately, threatening to disrupt the progress in inflation. While USD/CHF has not moved much, given that Switzerland trades mostly with the EU, the franc’s value relative to the euro is much more important for price pressures. Another factor likely to keep the Bank cautious is that most of the improvement in inflation is owed to higher energy prices – not the healthy demand-driven rising prices officials would like to see. Core inflation that excludes volatile items like fresh food and energy, rose only 0.4% year-over-year in May.
Still-subdued core inflation combined with the latest gains in the franc will likely be enough to dissuade the SNB from appearing too optimistic on the economy. Even mentioning the words “normalisation” or “hike” could lead to a sharp rally in the franc that undermines the Bank’s inflation-lifting efforts, so officials will probably avoid that route. Not to mention that the ECB – whose actions the SNB mostly mimics with a lag – just signaled it will not raise interest rates for at least another year, implying the SNB is highly unlikely to take any action over that timeframe either.
If the Bank exhibits no signs it is considering normalization, that would be a factor arguing for a weaker franc over time from a relative rates perspective, especially against currencies of nations that are normalising their policy, like the US dollar. The key risk to this assessment would be another wave of risk aversion that causes the franc to attract safe-haven inflows, for instance, due to a further escalation in global trade tensions.
Technically, looking at USD/CHF, immediate resistance to advances may be found at the June 15 high of 0.9990. An upside break of that zone could aim for 1.0060, the peak from May 10. Even higher, the 1.0100 level would likely come into focus, defined by the top of 11 May 2017.
On the flipside – and in case the SNB surprises in a hawkish manner or risk-off developments increase the franc’s appeal – support to declines may come around 0.9915, the trough of June 19. If the bears overcome it, buy orders may be found near 0.9825 – a level which halted multiple declines in June. Lower still, the June 7 low of 0.9785 would increasingly attract attention.
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