Alvin T. Tan, Research Analyst at Societe Generale, suggests that as the market gradually adjusts to the idea of policy tightening by the ECB, it is useful to consider the options ahead for the Swiss National Bank (SNB).
“Switzerland is entirely enclosed by the euro area, which is its largest trading partner, and so is likely to share in the brightening growth and inflation outlook of the single-currency area. But its current policy setting is constraining the SNB’s policy options.”
“What is striking about the Swiss franc is that, notwithstanding the SNB's repeated assertions that it is "significantly overvalued", there is little economic impact from said overvaluation.”
“To put it plainly, there seems to be little serious economic consequence from the franc's supposed overvaluation. The combination of the dissipating deflation threat and the brightening growth outlook is weakening the urgency of maintaining ultra-loose monetary policy in Switzerland. However, the dangers posed by policy normalisation to the SNB have grown significantly.”
“The French presidential election remains ahead of us, and this political risk will keep the SNB on alert. After the election, and assuming that Marine Le Pen does not win, we expect the ECB to take steps towards policy normalisation in 2H17. This could then be followed by the SNB once the pace of reserves accumulation has moderated significantly. A higher EUR/CHF is reliant on a stronger euro.”
“We thus expect the SNB to lag the ECB substantially in taking steps towards policy normalisation, which would argue for a gradually higher spot path for EUR/CHF over the next few quarters. Policy normalisation would first take the form of a stepping back from market intervention, and it is unlikely that the SNB would hike interest rates before the ECB. Until the start of ECB policy normalisation, however, the risks for the EUR/CHF exchange rate still lie decidedly to the downside, not so much because of political risks, but because of the persistent appreciation pressures on the franc coming from the positive Swiss external balance and little economic evidence that the franc is indeed overvalued relative to the euro.”