SNB December 15th
The Q4 SNB meeting on December 15th is widely expected to be a non-event with the bank remaining on hold and warning against excessive CHF strength. However, there are still opportunities around the meeting. Over the last eight SNB meetings, the market has paid out around 72bp cumulatively on concerns that more cuts are forthcoming.For now, seemingly, the SNB are content to remain on hold unless FX markets force their hand.
However, one story that has flown somewhat under the radar is that of the SNB’s FX reserves which have been moving steadily higher. The latest data for November showed that intervention was to the tune of CHF21.5bln whilst reserves are now at CHF648bln; 31% larger than before the currency peg was removed. Provided that the SNB maintains their “leaning against the wind†policy, then CHF strength should be limited, especially in the context of the “Trumpflation†trade which should weigh on low-yielders such as JPY, EUR, and CHF over 2017.
SNB To Remain On Hold Over 2017
2015 saw the SNB’s currency peg removed and rates cut to a record low of -75bp. However, 2016 was a largely uneventful year for the Swiss Franc with the SNB keeping rates on hold and merely reiterating that the currency is too strong and they would act if necessary. The bank’s stance makes sense given that the recovery in inflation remains fragile and still in the deflationary territory at -0.3% on the year and in decline again.
This is a theme which looks likely to continue over 2017 with negative rates to remain in place until the ECB begins reversing its own monetary policy stimulus and exits a negative interest rate regime.Given the ECB;s recent announcement that they intend to extend QE until at least December 2017 it seem reasonable to expect that this won’t be happening until 2018 at the earliest.
SNB Intervention Over 2016 Capping CHF Strength
Over the course of 2016, data shows that the SNB’s intervention in currency markets has amounted to monthly purchases of around CHF71bln. This number is quite significant when compared against 2015’s figure of CHF76.4bln which was over a year where the SNB were dealing with the removal of the currency peg. Brexit and the US elections are the two clearest examples of SNB intervention where the bank sought to cap the appreciation of CHF as global risk aversion led to safe haven demand. The spikes in intervention over those events were noticeable through the SNB’s reserves data. In November specifically, the CHF21.5bln worth of FX purchases clearly relate to the bank’s attempts to stem safe-haven in flows around the Trump election.
