Expectations For September SNB Meeting
Central bankers across the G10 space have moved drastically to the dovish side this year. A renewed outbreak of trade tariffs between the US and China has exacerbated the global downturn, keeping inflation subdued across the board. With the Fed, the ECB, the RBA and RBNZ each having eased further this year, the market is now turning its attentions to the upcoming September SNB meeting this week.
The consensus forecast is for an easing announcement from the SNB, with the market looking for a .25% rate reduction as the base scenario. Inflation continues to hover near to zero despite the SNB having maintained an accommodative stance to monetary policy. Furthermore, strength in the exchange rate is keeping downward pressure on import prices creating further price instability for the SNB. In order to boost inflation, the SNB needs to stem any further appreciation in CHF which will most likely only be achievable through a large rate cut.
If the SNB abstains from cutting rates at this juncture, there is a risk of acute appreciation in the exchange rate. An unchanged decision would be bullish for CHF, signalling that the bank is not comfortable with lower rates, instead preferring to continue its method of targeted FX intervention.
Since the SNB met last in June, the Franc has risen by 2% against EUR and given the disinflationary impact that recent strength has had the economy, this is a very real problem for the SNB. The recent easing move by the ECB creates a further dilemma for the SNB. A failure to act at this juncture would likely create downward pressure in EURCHF over the near to the medium-term horizon.
The Swiss economy is greatly exposed to the global cycle with exports accounting for over 65% of GDP. As a result of this composition, the Swiss economy is more vulnerable to the global slow-down than the eurozone economy and as such, the moderation in economic activity this year has had a far more severe impact on Switzerland than the eurozone. Swiss GDP is set to come in at just 1.2% this year following a 3% level in 2018 and is expected to slow again to 1% next year.
Inflation is also moving lower. After peaking at 1.2% last year, CPI has been heading lower and appears to be depreciating on a structural basis rather than just cyclically due to a lapse in the transmission of monetary policy which has so far failed to lift prices.
What Can The SNB Do?
Given its already very low policy rates, the SNB has limited room to act. The question, therefore, appears to be whether the SNB will look to ease by .25% in the first instance, and ease again later in the year if needs be, or simply go ahead and cut by a larger size first off. The RBNZ was successful over the summer in impact NZD lower via a larger than expected rate cut, which is a model the SNB might look to adopt at this stage.
Technical & Trade Views
EURCHF (Bearish below 1.09 targeting 1.08)
EURCHF from a technical and trading perspective. Recovery off of the recent 1.0813 lows has run into selling pressure at a retest of the 1.0966 zone. While below here, the short term outlook is negative and I will be looking for a continuation of the bear trend, signalled by a bearish cross on the momentum indicator, with a break of 1.09 targeting a move down to 1.08 first. Only a break back above 1.0966 will negate this view.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.