SNB unlikely to signal policy shift, may reiterate franc remains “highly valued” – Forex News Preview
March 14, 2018 1:26 pm
The Swiss National Bank (SNB) will announce its rate decision on Thursday at 0830 GMT. While no change in policy is expected, investors will be looking for signals on whether the Bank is contemplating an eventual exit from its ultra-loose policies. With Swiss inflation still subdued though, the SNB may be reluctant to provide such signals, for now at least.
In contrast to most of its major counterparts like the European Central Bank (ECB), the SNB has provided no hints that it is considering an exit from its negative interest rates policy. Ever since the 2008 crisis, the SNB has largely mimicked the ECB’s policy actions, typically with a lag of a few months. Against this backdrop, the focus of this meeting may be on whether the SNB is set to follow in the ECB’s footsteps once again and hint it could move towards the stimulus-exit door in the foreseeable future.
Looking at Swiss economic data though, there is little urgency for the SNB to start preparing the ground for a stimulus exit. Even though GDP growth for Q4 was strong and the unemployment rate is very low, inflation remains extremely subdued. The CPI rate ticked down in February to reach 0.6% in yearly terms, staying far below the SNB’s target of “less than 2%”.
Another factor likely to dissuade the SNB from appearing too optimistic is the exchange rate. The Bank has been very vocal about the franc in recent years, reiterating time and time again that the currency is too strong. A stronger currency makes it more difficult for inflation to rise as it pushes down on import prices, and also weighs on exports and growth. Thus, the SNB desires a weaker currency, but that has not really materialized despite record-low rates and frequent interventions in the FX market.
While the franc did lose a lot of ground against the euro in 2017, recent comments from SNB officials still describe it as “highly valued”. Bearing all these in mind, policymakers will likely want to avoid appearing overly hawkish and hinting at future rate hikes, as that could lead to gains in the franc, and hence make it more difficult for inflation to rise. On the other hand, if they maintain a dovish tone then the currency may weaken further, particularly versus the stronger euro, and thereby help inflation to reach its target.
In other words, by choosing to simply be patient and say nothing new for now, the SNB would probably make its own job easier. The alternative would be to signal it is considering normalizing policy in 2019 for instance, and risk a sharp currency appreciation that could undermine its inflation-lifting efforts.
In case the SNB plays down rate-hike expectations and reiterates that the franc remains highly valued, dollar/franc could edge higher and target the 0.9535 resistance territory, marked by the peaks of March 9. An upside break of that area may see extensions towards the 0.9570 zone, identified by the lows of January 17.
On the flipside, should the Bank appear optimistic on the prospects of the economy and hint at an eventual exit from negative rates, that would likely come as a surprise given the nation’s still-subdued inflation rate, and could thus lead to significant gains in the Swiss currency. In this scenario, dollar/franc is likely to edge lower and aim for a test of the 0.9335 hurdle, marked by the March 2 low. If sellers manage to overcome that barrier, then support may be found near the troughs of February 2, at 0.9255.
The Swiss National Bank (SNB) will announce its rate decision on Thursday at 0830 GMT. While no change in policy is expected, investors will be looking for signals on whether the Bank is contemplating an eventual exit from its ultra-loose policies. With Swiss inflation still subdued though, the SNB may be reluctant to provide such signals, for now at least.
In contrast to most of its major counterparts like the European Central Bank (ECB), the SNB has provided no hints that it is considering an exit from its negative interest rates policy. Ever since the 2008 crisis, the SNB has largely mimicked the ECB’s policy actions, typically with a lag of a few months. Against this backdrop, the focus of this meeting may be on whether the SNB is set to follow in the ECB’s footsteps once again and hint it could move towards the stimulus-exit door in the foreseeable future.
Looking at Swiss economic data though, there is little urgency for the SNB to start preparing the ground for a stimulus exit. Even though GDP growth for Q4 was strong and the unemployment rate is very low, inflation remains extremely subdued. The CPI rate ticked down in February to reach 0.6% in yearly terms, staying far below the SNB’s target of “less than 2%”.
Another factor likely to dissuade the SNB from appearing too optimistic is the exchange rate. The Bank has been very vocal about the franc in recent years, reiterating time and time again that the currency is too strong. A stronger currency makes it more difficult for inflation to rise as it pushes down on import prices, and also weighs on exports and growth. Thus, the SNB desires a weaker currency, but that has not really materialized despite record-low rates and frequent interventions in the FX market.
While the franc did lose a lot of ground against the euro in 2017, recent comments from SNB officials still describe it as “highly valued”. Bearing all these in mind, policymakers will likely want to avoid appearing overly hawkish and hinting at future rate hikes, as that could lead to gains in the franc, and hence make it more difficult for inflation to rise. On the other hand, if they maintain a dovish tone then the currency may weaken further, particularly versus the stronger euro, and thereby help inflation to reach its target.
In other words, by choosing to simply be patient and say nothing new for now, the SNB would probably make its own job easier. The alternative would be to signal it is considering normalizing policy in 2019 for instance, and risk a sharp currency appreciation that could undermine its inflation-lifting efforts.
In case the SNB plays down rate-hike expectations and reiterates that the franc remains highly valued, dollar/franc could edge higher and target the 0.9535 resistance territory, marked by the peaks of March 9. An upside break of that area may see extensions towards the 0.9570 zone, identified by the lows of January 17.
On the flipside, should the Bank appear optimistic on the prospects of the economy and hint at an eventual exit from negative rates, that would likely come as a surprise given the nation’s still-subdued inflation rate, and could thus lead to significant gains in the Swiss currency. In this scenario, dollar/franc is likely to edge lower and aim for a test of the 0.9335 hurdle, marked by the March 2 low. If sellers manage to overcome that barrier, then support may be found near the troughs of February 2, at 0.9255.
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