© Peter Frank
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To my mind, there is a lot of nervousness in the SNB step to the rhetoric. President Jordan distressed that extra efforts will be made to protect the floor for the currency pair, alongside with the weak CPI in Switzerland. The deterioration in the demand figure would be worth mentioning. Hence, with all the risk aversion beginning to jump back into the FX market following the drop we have seen in equity quality prices and other figures – Swiss officials are worried. It is a real risk the EUR/CHF could reach 1.20, whereas it is already trying to get below 1.2050. We think that the SNB will put effort to protect the floor, even though it is going to be very difficult.
Therefore, the last thing that the SNB wants is the negative rate. Clearly, back in 2011, when the floor was broken, it cascaded down, whereas the market was in a risk of having another fall. We anticipate further runs on equities and the flood of capital heading to the safe heaven currencies. I believe probably the most dangerous thing would be the next bounce of risk aversion driven by a real event. There has not really been any dramatic data so far: we do not know if the Euro zone is in recession or not. From the technical point of view, only France and Italy are in a downturn, with negative GDP figures for Q1 and Q2. Hence, if we have the global risk aversive end happening at the same time, it is going to put a significant downward pressure on the EUR/CHF. Some experts would say that it is a rather strategic imperative for the SNB to stop the floor from breaking.
The SNB cut inflation forecasts for 2015 and 2016 to 0.2 % and 0.5 %, respectively, and earlier this week figures showed Swiss consumer prices fell from a year ago for the first time in seven months in September. Given the falling commodity prices, lower oil prices, and a weaker world economy, can we say that the Swiss economy is under a serious risk of a downward trend?
The September headline for inflation got back to negative, which harmonizes flat, however, we had a disappointing drop in the CPI. That is a considerable problem for the SNB, since they are interested in positive inflation, for which it is a policy failure. Although the data has been mixed, the numbers are generally worsening. Although the consumers are not as active as we would like to see them, I believe the main issue is in the export sector. Looking at the ZEW Survey estimate, we had a big dip in October figure, which is the lowest since the second half of 2012. Hence, all the improvements of the previous 2 years have been whipped out from the expectations of Swiss industry. Therefore, to my mind there are dark clouds gathering, not only in regards of deflation, but also from a big drop in business expectations. The SNB are worried, and the last thing they need right now is the appreciation of exchange rate. However, they are going to try their best to defend the floor for the EUR/CHF and the question is whether they can do it or not.