Europe – Swiss Floor Not under Immediate Threat

• SNB more dovish than expected

• Swiss floor supported by potential forex intervention

• SNB inflation projections lowered

The Swiss National Bank (SNB) provided no major surprises in its quarterly policy review earlier this week, but the tone of its statement was probably more dovish than the market had expected. For the 13th consecutive quarter, the SNB chose to keep its target range for three-month Libor (London Interbank Offered Rate) at 0.0% to 0.25%.

SNB policymakers noted that the economic outlook has “deteriorated considerably," certainly backed up by disappointing second-quarter gross domestic product (GDP) data and weak eurozone growth. The central bank repeated that it will intervene in the forex market to prevent CHF from surpassing the €1.2000 limit with the "utmost determination." The Swiss ceiling was imposed three years ago on fears that a strong CHF would threaten the competitiveness of Swiss exporters within the European Union.

The Swiss Hold Firm

The SNB kept its outlook for 2014 inflation rate unchanged at +0.1%. However, it lowered its projections for next year to +0.2% from +0.3% while acknowledging that the risk of deflation has increased again. Lowering the inflation outlook would suggest that the SNB sees the CHF weakening less-than-expected and means that the floor will remain in place for the foreseeable future. The bank also trimmed its forecast for GDP this year to "below +1.5% from the +2% projected in June."

Many would argue that the dovish talk could be laying the groundwork for monetary easing at a later date. Any suggestion of the SNB introducing negative deposit rates is too rash. Realistically, the SNB would only ever consider using negative deposit rates once the €1.2000 floor comes under significant pressure when forex intervention seems to be failing.

For now, the threat of intervention is likely to limit the EUR/CHF downside (€1.2080) as traders will continue to focus on the central bank’s commitment to defending the floor. Short-term EUR/CHF resistance will now be around €1.2120-25, the level from where it fell on the SNB announcements.

What to Expect Next Week

Whatever happens, the market will miss the Scots. Their national sovereignty debate on its own brought back some much needed volume and volatility to the forex space. In a matter of 10 days, the pound has been trading robustly within the £1.6052-£1.6645 range.

European Central Bank President Mario Draghi kickstarts the week on Monday testifying on monetary policy before the European Parliament's Economic and Monetary Committee in Brussels. Flash manufacturing comes to us from China, France, and Germany, and by midweek, Germany will also release its latest Ifo business climate results.

Meanwhile Down Under, traders will be listening to Reserve Bank of Australia Governor Glenn Stevens speak at the Melbourne Economic Forum. Investors with long AUD carry-trade positions will want to know what he has to say as he has a penchant for talking the AUD down to low levels.

The week will end with U.S. durable goods orders and weekly jobless claims on Thursday.