CHF: Negative rates to win out - ING

Having suffered at the hands of the SNB’s shock January 2015 floor departure, most investors are reluctant to venture anywhere near EUR/CHF suggests Chris Turner, Global Head of Strategy at ING.

Key Quotes

“This year’s BIS FX turnover survey showed EUR/CHF trading volumes have dropped a staggering 40% over the past three years, versus a 5% decline for all FX pairs. This makes the SNB’s job of controlling EUR/CHF a little easier. Here the SNB remains committed to ultra-loose policy (the most negative policy rate in the world at -0.75%) and steadily intervening in FX markets.” 

“Instead, one of the key issues will be how domestic banks cope with negative rates. Initially the generous exemptions (20 times Minimum Required Reserves) shielded the domestic banking system from negative rates. But as the SNB’s balance sheet continues to grow on the back of intervention, the exposure of local banks to negative rates via CHF sight deposit holdings is growing. This may well prompt the SNB to increase exemptions.”

“Despite the still depressed levels of EUR/CHF, the real CHF is actually 6% weaker than its 2015 peak and 11% weaker than its peak in 2011. And recently the Swiss business confidence indicator, the KoF, pushed up to levels last seen in early 2014.”

“While one could make a case that Swiss inflation will pick up, growth is reasonable at near 2% and the SNB is fearful of the side effects of negative rates on its banking industry – meaning that SNB allows CHF to appreciate – this looks the alternative view. Instead our baseline sees SNB as very committed to the current policy set-up – and this would support a gentle drift higher in EUR/CHF assuming European political challenges can be negotiated over the next 12 months, and possibly 24 months, with Brexit.”

“Our forecast sees a modest pick-up in EUR/CHF towards the end of 2017 and then again in 2018. We imagine the SNB will lag any ECB normalisation. It will also be quietly hoping that a Bund tantrum and higher EUR swap rates will be worth a 3-5% rally in EUR/CHF.”