Release: Swiss National Bank Rate Decision
Consensus Forecast: <0.25%
Date/Time: 03/15/12 4:30 AM ET (08:30 GMT)
SNB Likely to Hold Pat as EUR/CHF Cap Stabilizes Economy
With the Swiss National Bank meeting only once a quarter there seems to always be some chatter and rumors about the possibility that the SNB will raise its EUR/CHF floor from the current level of 1.20. However such scenario in the upcoming release seems unlikely.
First off the economy is showing some signs of stabilization, if not strength. The KOF leading indicator improved in February, retail sales rose more than expected for January, manufacturing barely contracted and the ZEW measure of investor confidence registered a flat reading in its report today, the third month that this indicator has improved – not climbing out of negative territory.
In other words while some politicians and some in exports and tourism industries would love to see a weaker CHF, the SNB likely considers its current path a successful one and will resist being pressured into further moves to depreciate the currency.
However we should keep an eye out open for such scenario which would certainly mean a weaker Swiss franc.
From Bloomberg: “With the economy seemingly avoiding a recession and fears of deflation receding, there’s no need for the SNB to act on its cap and the benchmark rate anytime soon,” said Caesar Lack, an economist at UBS AG’s Wealth Management Research in Zurich. “However, they might give first hints of longer-term inflation risks which could justify a tightening further down the road”
The SNB, which won’t hold a briefing, will also publish its latest economic projections. At the December quarterly meeting, it forecast consumer prices to fall 0.3 percent this year before climbing 0.4 percent in 2013. The economy will expand 0.5 percent this year, it said.”
The threat of deflation has been a thorn in the side ofthe Swiss National Bank as its stronger currency has caused import prices to fall substantially. However with stabilization in the exchange rate and higher energy prices, the downward trend in inflation should bottom out and turn upward in the coming months.
The EUR/CHF pair saw more volatility this week as highlighted in today’s FXTimes technical update: EUR/CHF Reaching Toward 2012 High with SNB Meeting Ahead
Therefore we should not expect much change from the actual statement except for dissecting the latest growth and inflation forecasts.
Prior to the release though, we would like to consider 3 other key factors when it comes to the Swiss franc.
1. Investors Turning to CHF and JPY for Carry Trades?
First up is the consideration that the US dollar has been strengthening of late and with expectations around further quantitative easing by the Fed diminishing with each positive US report – and with no hints from Bernanke or the FOMC of more stimulus – the US dollar is losing its appeal as a funding currency for carry trade.
Instead, traders are turning to the Japanese yen and Swiss franc as they don’t want their positive carry interest to be mitigated by changes in the exchange rate, which is what is happening right now with US dollar crosses against higher yielders. Because all three – the USD, JPY, and CHF – have near zero interest rates it argues that the dollar will continue to gain against its carry trade funding rivals.
2. SNB’s Independence
The second consideration is the SNB’s independence as politicians have grown more concerned about the SNB’s action and would like to curb its ability to undertake non-standard measures like currency purchases. At the same time there was also talk of capping how much assets the bank could hold, which may have limited the moves the SNB could take in its attempts to keep the Franc from appreciating.
From Bloomberg: “Swiss lower-house lawmakers rejected a proposal to curb the central bank’s ability to intervene in currency markets, with some calling on policy makers to raise the franc ceiling. Lawmakers in Bern rejected the proposal initiated by the Swiss People’s Party to toughen supervision over currency purchases by 129 votes to 52. They also voted against a motion to force the central bank to keep a buffer of equity and currency reserves of at least 40 percent of overall assets, while backing a proposal demanding the government examine ways to weaken the Swiss currency.”
Those attempts to take away some of the independence of the SNB were rejected which leaves the door open for the SNB to act as aggressively as needed.
3. Intervention is Working
Looking at some figures from a recent Wall Street Journal we see the SNB did a much better job in terms of managing its balance sheet and currency holdings in 2011 compared to 2010 – a positive indication of its stewardship throughout the EUR/CHF cap.
- The Swiss central bank’s full-year profit of 13.5 billion Swiss francs ($14.8 billion) compared with a loss of CHF19.2 billion in 2010. In January the bank reported a provisional profit of CHF13.0 billion.
- Consolidated foreign-currency positions contributed CHF7.7 billion to the profit, of which interest income of CHF5.5 billion and the CHF3.7 billion price gain on interest-bearing paper were the most important components,” the SNB said.
- The SNB bought around CHF18 billion worth of foreign currencies during 2011.
- That compares with CHF144 billion it used in the previous year to buy currencies, a policy that sparked a record loss.
- Euros currently make up around half the central bank’s reserves, while about a quarter comprise dollar holdings
- The SNB’s improved balance sheet also reflected the euro’s gains in the wake of the introduction of the franc ceiling
Therefore the amount of effort needed to maintain the 1.20 floor has been minimal, and could be considered quite successful. As a result with intervention of this type working, the SNB is likely not going to upset the apple cart by hiking the EUR/CHF cap or introducing other measures to weaken its currency.
We’ll review the SNB decision and reaction in our daily Market Intelligence Briefing on Thursday. For information on special subscription rates for FXTimes briefings, click here.
Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.