As we had expected the SNB held policy rate at -0.75% and reiterated wiliness to intervene in FX markets for benefit of the overvalued franc. While SNB President Jordan has emphasized the importance of the interest rate differential for FX pricing the lack of aggressive ECB action means little spill into EURCHF. Policy rate differential has narrowed to 25bp which is manageable and not historically significant. Expectations for the ECB to reduce the deposit rate again in March 2020, the SNB is keeping their powder dry. Secondly, the SNB stressed the deterioration in the global economic backdrop and revised down Swiss growth forecast (“between 0.5% and 1% for 2019 as a whole, compared to around 1.5% in June”) for the coming quarters but seem to understand lower negative rates would not help growth. The inflation forecast was lowered again, partly due to strong CHF, to 0.4% from 0.6% for 2019. Too the relief of many banks the exemption threshold calculation for negative rates would be reviewed. The SNB stated, “exemption threshold will now be updated monthly and thereby reflect developments in banks’ balance sheets over time”. The more equitable division of negative rate burden will help banks deal with a challenging interest rate environment. The new exemption threshold calculation will kick-off 1st November 2019.
Overall, the SNB decided to “play it safe” keeping what limited firepower they have left on the side. With an bloated balance sheet and deep negative rates the SNB needs to be tactical in policy action. The SNB is clearly not the biggest, so needs to be smarter. The SNB might be hoping that President Draghi view of maxing out policy easing, means a switch to fiscal policy, which will have a lower direct effect on (and yield differentials) foreign exchange pricing. The lack of motivation by the SNB to cut rates or significantly challenge FX market directing, combined with uncertainty around US-China, Saudi-Iran and weak economic backdrop suggest further build-up in shorts EURCHF.
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