CHF: Guided by the SNB policy – Rabobank

Jane Foley, senior FX strategist at Rabobank, points out that the CHF is the best performing G10 currency on a 1 day view as SNB President Jordon appeared to stop short of market expectations regarding dovish policy commitments at this morning’s press conference.

Key Quotes

“The pledge to maintain the same level of policy accommodation comes at a time when investors are speculating about the likelihood of further policy accommodation from several other major central banks. That said, the degree of policy accommodation in Switzerland is already significant and, unlike other G10 central banks, the SNB maintains a commitment to intervene in the FX market “as necessary”.”

“The big change announced in today’s press conference was the announcement about the central bank’s transition from Libor to a new Policy Rate focused on SARON, an overnight rate.  That said, in itself, the change should not have significant implications for the outlook for the CHF.”

“Going forward Jordon has confirmed that the central bank will ensure that secured short term money market rates are kept close to the new Policy rate.  Also interest rates that banks pay on their sight deposits will correspond to the SNB policy rate, currently at -0.75%.”

“In terms of the outlook for policy, Jordon’s speech today lacked the dovish quality obvious in comments of some other G10 central bankers.”

“In tune with Jordon’s balanced outlook he referred to CHF as ‘highly valued’. This is a far less charged choice of words than ‘overvalued’.  On many academic measures of fair value the CHF is overvalued against a long list of other currencies. The SNB’s response is to use FX intervention as a policy tool.  However, this goes against the commitment of the larger G7 nations who have pledged for years to allow markets to set exchange rates.”

“Going forward we see little chance that the SNB will relax its commitment to extremely loose policy settings. While this has had some success in undermining the safe haven credentials of the CHF, the currency is set to remain particularly prone to buying pressure in period of heightened risk aversion in the Eurozone.  Given slowing global growth we expect EUR/CHF to edge lower towards the 1.10 level on a 12 mth view.”