SNB Preview: Leaving the door open for intervention, just in case

Thomas Jordan, the Governor of the Swiss National Bank, is not the most popular person for forex traders nor forex brokers. On January 15th, 2015, the SNB pulled the rug, or the floor, under EUR/CHF that it had defended for over three years. The surprising move caused a sharp and violent fall in the price, liquidating traders' accounts and sending some brokers under the bus as well.

For the first time since that day, the EUR/CHF touched the 1.2000 level in April this year, in the period before the upcoming decision. Since then, the cross fell back to the 1.15 handle, but the SNB can breath more easily.

Pledge to intervene - keep it just in case

While they removed the peg, the authorities in the Alpine country pledged to intervene in foreign exchange markets from time to time to weaken the franc and fight deflation. In recent months, there has been no evidence of any intervention. The SNB does not need to intervene as the franc is not that dear anymore. Nevertheless, they are not expected to omit this pledge from the statement. 

Also, the SNB's official goal in weakening the franc is preventing deflation. According to recent data, the danger of falling prices is diminished. Headline CPI is up 1% according to the latest figures. Core inflation is at 0.4%, not far from 0%, but quite stable. A devaluation in the franc would push prices towards 2%, the holy grail of central bankers, but the SNB would not like to battle markets. Therefore, leaving the pledge without any intervention is the likely path of action.

Things could change later on. With the renewed float of the Swiss currency, it has somewhat returned to its old days, pre-2011, as a safe-haven currency. It is second to the Japanese yen and off the radar for most traders. Recent clashes around trade have resulted in some demand for the Swissie, but indeed not a landslide. Should the situation worsen, the CHF could come under huge demand. 

The SNB is unlikely to hint about any potential intervention that is the result of a trade war, but they can surprise. 

Deep negative interest rates - no rush to raise them

The second policy of the Swiss National Bank is the interest rate which is at a negative -0.75% since that unforgettable winter day. Also here, there is no need to rush.

The SNB pushed its interest rate to these depths of negative ground in preparation for the European Central Bank's QE program. The ECB recently announced that it would cut its bond-buying scheme from €30 billion to €15 billion from October to December and end it entirely from 2019.

However, ECB President Draghi added a barrage of conditions and a pledge to maintain interest rates at current levels through the summer of 2019. All in all, the ECB's move toward the exits is slow and does not require the SNB to follow with its own rate hikes.

How will the Swiss franc react?

In case the SNB leaves both policy measures unchanged as expected, markets may chop their way up and down but without any lasting effect. 

What can move the franc? Any unlikely hint that the interest rate may rise could boost the franc. Such a suggestion would come as a response to slightly higher inflation and is not priced in.

Another unlikely scenario is the SNB issues a grave warning about dangers to global trade. This implies a potential intervention to weaken the franc, and the CHF may respond by dropping. 

In any case, the pair to watch is the EUR/CHF. Due to the broad economic ties with the EU and the euro-zone, any reaction is first felt against the common currency and only afterward against the US Dollar.

More: SNB's Jordan: Developments in recent days show currency market situation remains fragile