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    What next from the SNB?

    It’s less than a month since the Swiss National Bank (ISNB) decided to drop its EUR/CHF peg. That move caused ructions in the market and a 20% increase in the Swiss franc’s value. But rather than sitting idly by after such a radical move, the SNB has been fairly active in the weeks since dropping the peg, and further action could be on the cards.

    Last week, rumours started to spread that the SNB could introduce capital controls. These are radical measures that can stop people from taking their money out of bank accounts etc. The last country to impose capital controls was Cyprus when it went through its sovereign debt crisis. Countries like Switzerland are not usually associated with capital controls, so why does the market expect further action from the SNB?

    • Growth and inflation: The SNB has reduced its growth and inflation forecasts for this year to 2% and -0.1% respectively, as a strong franc weighs on the economy. The KOF economic institute has cut growth forecasts even further and is now expecting a recession in Switzerland this year.
    • If the SNB was to implement capital controls the reason could be two-fold: 1, to halt deposit flight and limit the risk of damage to the banking system now that Switzerland is charging people to keep their money on deposit in the banks. And 2, to promote lending by the Swiss banking system to boost the economy and, hopefully, reduce Swiss franc appreciation.

    Other options open to the SNB:

    We continue to think that capital controls would only be a last resort for the SNB as a measure this radical could trigger credibility issues. The chairman of the SNB, Thomas Jordan, said so himself in media interviews last weekend. However, he did suggest that the bank could try other policy measures to boost growth and potentially weaken the Swissie in the coming weeks and months:

    • Actively intervening in the FX market to weaken the franc: the SNB did this for 3.5 years whilst they had the EUR/CHF peg in place.  Jordan said that the SNB is “observing the exchange rate situation as a whole”. He declined to say if the SNB has intervened in the market, although we can assume that it has as he said that the SNB has the best impact if it surprises the market when it intervenes.
    • Negative interest rates: the SNB cut interest rates to -0.75% at the same time as it dropped the currency peg. Although negative deposit rates typically weaken a currency, this time it didn’t work that way and the Swissie is still 14% higher on a trade weighted basis than before the peg was dropped. Jordan said at the weekend that the SNB could cut interest rates further into negative territory in the future. Although he admitted that there is a limit to how far you can cut rates into negative territory, the SNB is still “questioning” where that level is.

    Overall, we think that further intervention in the FX market is the most likely action from the SNB, with the prospect of a deeper cut to negative for interest rates in the coming months. We believe that the prospect of capital controls is remote at this stage, and the bank will try other methods first.

    The outlook for the Swisssie:

    The strong Swissie is a major problem for the SNB as it is weighing on growth and is a factor weighing on the inflation rate. However, from a technical perspective the risks for the Swissie are still to the upside, especially vs. the EUR:

    EURCHF: In the short term, watch resistance at 1.0466. If we can get above this level then it may suggest that bullish momentum is weakening. On the downside, 1.0357 is initial support. In the longer-term, now that the ECB has announced QE, EURCHF could come under persistent selling pressure. This could make resistance at 1.06 hard to break. We expect 0.9715 to hold as major support.

    USDCHF: This pair is in consolidation mode below its 200-day sma at 0.9302, which is key resistance, as you can see in the chart below. Short term support lies at 0.9170, the low from 30Th Jan. After the removal of the EUR/CHF peg, a major top has formed for this pair at 1.0240. However, the break of 0.9144 resistance – the 61.8% retracement of the Jan 15th sell off, suggests there is strong buying momentum, which could trigger another leg higher in this pair. Above the 200-day sma opens the way to 0.9554.

    Overall, we think that USDCHF has the greater potential for a longer-term rally compared to the EUR/CHF, which could remain under pressure as the ECB embarks on a large QE programme.


    • Rumours of Swiss capital controls could be overstated.
    • We could see further SNB intervention in the FX market, particularly if EUR/CHF drifts below 1.02 and then back to parity.
    • We also expect further cuts to Swiss interest rates deeper into negative territory in the coming months.
    • We don’t think that the SNB will implement capital controls for the foreseeable future.
    • Overall, we think that the Swissie could continue to weaken vs. the USD, while EURCHF remains vulnerable.


    Figure 1:


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