SNB maintains expansionary policy as expected

Even stretched, we doubt that today’s SNB Monetary policy assessment and following press conference will have any profound or global ramifications. The small, open Alpine country is at the mercy of larger superpowers. Policy setting in a purely reactionary position. Overall, the SNB took a decidedly dovish tone as growth outlook continues to decelerate and risk to the global economy increases. Inflation forecast rose 0.6% from prior quarter 0.3%, primarily due to “rise in the prices of imported goods” caused by the weaker CHF. It was universally expected that they maintain its three-month LIBOR target at -1.25% to -0.25%. In regards to FX, there was no change in the view that the CHF is “still highly valued” (same as March language), and reinstated commitment to physical FX intervention if necessary. Following much-publicized comments, SNB President Jordon view that interest rates can go deeper into negative territory. In the past, Jordon stated, “If we come to the conclusion that it’s necessary to fulfill our mandate, then of course we’re ready to use our monetary policy instruments.” Despite the Swiss government marginally raising its economic growth outlook for 2019 to 1.2% (GDP grew by 2.3% in the first quarter) and SNB's 1.5% forecast, the SNB statement took a cautious tone. Threats specifically relating to US-China trade tensions, Brexit uncertainties and eroding Italian financial conditions (spilling over to Italy-EU relations). Although the SNB is communicating a friction-less environment to policy setting we suspect things are more complicated. The central bank’s massive balance sheet has become a concern and assuming more FX exposure (even converting into equities) is not a given. While negative interest rates are hurting, banks and savers while providing upward momentum to housing prices (highlighted in the statement). With global monetary policy normalization reversing, and macro-economic risk increasing, CHF will remain in high demand.

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Historically, CHF has outpaced G10 FX during Fed easing cycle and recession. Despite the SNBs negative interest rate policy and threats physically intervene in currency markets, CHF is the king of economic safe-haven plays. Switzerland has the largest current account surplus as a percent of GDP in the majors. Last month the CHF has gained 2.5% against the USD with signals that the trend could accelerate sharply should the global economy deteriorate further. A lack of positive developments at this weekend G20 will put downward pressure on EURCHF.