Giles Coghlan LLB, Lth, MA
HYCM
What’s next for the SNB and the CHF? In December’s meeting, the SNB hiked rates by 50bps as expected to 1%. The SNB like central banks around the world has been responding to an uptick in its inflationary pressures. The latest headline inflation print for Switzerland is at 2.8% for December and that is well down from the August peak of 3.5%.
However, December’s reading for the core inflation rate showed an uptick to 2% which is in line with the high summer reading of 2%.
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On balance there is nothing happening in Switzerland that is very different from the rest of the world and Short Term Interest Rate markets are now pricing in a peak of 1.67% for this year and around a 50/50 split as to whether the SNB hikes by 25 or 50bps at the next meeting on March 23. The meaning? Well, a 50bps hike in March by the SNB could signal the end of its hiking cycle for now.
The takeaway
The recent CHF strength could start to see a top on the CHF index if you look at the chart below around the level marked.
With the SNB rate possibly peaking in March a retracement lower in the CHF could be a potential play against another currency that has a strong reason for gains. So, if US inflation rises, but Swiss inflation falls this may open up a divergence between the SNB and the Fed. If you want to have a quick way of seeing if this divergence is in play look at the bind yield spread between the US10Y and the CH10Y overlaid on a USDCHF chart.
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