Is Switzerland praying for a Fed rate rise? SNB QE soon?

With the FOMC rate decision just one week away, the market stands divided on whether a Fed rate hike would happen next week or not and if it does happen, will it create turmoil in the markets.


Most of the institutions – IMF, World Bank have said the rate hike at the current juncture may trigger volatility and turmoil. Furthermore, the big names have also taken a U-turn on a Fed rate hike. Earlier, till Q2 end, the fed rate hike was a net positive for the global economy and US economy. However, now the views have changed. Even the PBOC now feels rate hike could create turmoil or crisis in emerging markets.


So the question arises, whether anyone around really needs or prays for a Fed rate hike next week or later in 2015. There is some chatter about Switzerland praying for a fed rate hike as it is expected to weaken CHF and support the Swiss export industry and the tourism industry as well. The CHF may weaken in case of a Fed rate hike and provide relief to Swiss economy, but a no Fed rate hike could bring SNB very close to its own version of QE. Before discussing the same it is worth noting current SNB policy, Swiss bond yields and CHF exchange rate.

SNB interest rate changes

Change date                   percentage
January 15 2015            -0.750 % (already deep in –ve)
December 18 2014        -0.500 %
August 03 2011              0.125 %

• The interest rate paid on sight deposits at the SNB was cut on January 15 to -0.75%, meaning banks in effect pay a levy to park money at the central bank.

• The Swiss 10-year yield currently trades around -0.10%, the 2-year yield trades around -0.70%. (yields already in negative, foreign asset purchases under QE more likely)

• The EUR/CHF has recovered from the post-SNB low of 0.9651 to trade around 1.10, but still considerably below 1.2 (SNB cap).

The sharp rise in the CHF since 2009 and after abandoning EUR/CHF cap in January this year has hurt the Swiss Export industry. Exports in July were 9.3% lower than a year ago, with watch industry worst affected. Despite the slump in exports, the official figures showed the Swiss economy avoided falling into recession this year.

What if Fed hikes rates

The popular opinion is a Fed rate hike would weaken CHF and support Swiss exports. But, it depends on how markets react to fed rate hike. If we go by IMF and World Bank view, then a Fed rate hike (resulting risk aversion in the markets) would lead to strength in traditional safe havens – CHF and drop in EUR (policy divergence, especially after last week’s dovish ECB). Thus, a fed rate hike may push up USD/CHF, but could lead to a drop in the EUR/CHF pair. However, there is a chance that a rate hike would be read by markets as a net positive, leading to more weakness in the traditional safe havens like CHF. Consequently, the net result could be slightly positive for Swiss exports.

What if Fed delays rate hike

Again, the popular opinion says CHF would strengthen and hurt Swiss exports. However, the resulting strength in CHF could be sharper, especially if global markets read a no rate hike decision as a net negative for the global economy. The resulting risk aversion would further add to CHF strength (safe haven + dovish Fed). On the other hand, EUR, though a funding currency, could underperform CHF during risk aversion due to ECB’s readiness to do more. Consequently, the net result would be a serious trouble for Swiss exports.
Overall the scenario says, the SNB is moving closer to its own version of QE as suggested by the IMF in March here.

The question is whether Swiss QE is on the horizon or still a few months or a year down the line. The probability of the QE on the horizon is high if the Fed delays its rate hike and markets react in a negative way. The rate hike was sold as a net positive for the US and global economy, and thus, complete U-turn or signs of significant delay are more likely to spook markets and lead to serious risk aversion resulting in a sharp appreciation of CHF.