CHF: SNB needs to be a laggard – SocGen

Notwithstanding the SNB's repeated assertions that the franc is “overvalued", there is little economic impact from said overvaluation, according to Alvin T. Tan, Research Analyst at Societe Generale.

Key Quotes

“The Swiss current account, for example, is the largest among the G10 economies, and it has averaged over 10% of GDP in the past few years despite the franc's sharp appreciation. Even on the question of the franc’s valuation, one could derive vastly different conclusions using either the PPP or FEER methodologies.”

“Gradual reflation. The climbing Swiss PMI indicator and cyclical upswing in the euro area suggest that Swiss growth should be well supported in coming quarters despite the recent weakness in the GDP data. CPI inflation readings have also been trending fitfully higher into positive territory since late 2015, though still languishing under 1%. Switzerland therefore appears to fit well within the broader European reflation story.”

“Broad euro strength lifting EUR/CHF. The SNB fought hard to staunch franc appreciation in recent years, and EUR/CHF has finally started to climb as the ECB inched toward policy normalisation. The Swiss franc remains a favourite safe-haven currency, but barring global volatility spikes, EUR/CHF is expected to be dragged gradually higher by the appreciating euro.”

“SNB needs to lag the ECB. The ambiguity regarding the franc’s valuation means that the SNB cannot rely on a valuation mean-reversion process. Crucially, the SNB must continue to lag the ECB in policy normalisation, in our view. The weaker inflation picture in Switzerland certainly argues for greater prudence on the part of the SNB.”