© Esther Maria Reichelt
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It is quite hard to say at the present, as there are some indications which could mean the effect on the economy is not as strong as you would have expected initially. Of course, exports are a significant factor for the Swiss economy; however, a large share of it is not that price sensitive, since it is in the high-quality sector, which accounts for more than 50%. Hence, the impact on the exports due to the appreciation of the Swiss Franc could eventually be not as bad as you would have thought.
On the other hand, we may see an improvement in domestic demand, under condition that strong deflation will not have a dampening effect. Moreover, we can anticipate the demand to be resilient, since net immigration is still high. However, the larger danger for the Swiss economy might actually come from the more restrictive immigration plans ahead, but that is not yet a real threat. Definitely, there are some aspects are speaking in favor of Swiss economy. However, we have not yet seen the data and right now nobody has a full view as to which sectors will be dominating.
Last month, SNB President Thomas Jordan told Swiss radio SRF that the Franc was "clearly overvalued" and there was room for an even lower rate. To your mind, is that a worrisome signal for further rate cuts to take place?
I believe the room for a rate cut is quite limited, since further actions could spur the cash holdings. Negative rates are charged on bank deposits held by the central bank. Hence, if this cost of holding money becomes too high, it could become more profitable to keep this money in cash. By reducing the rate too far, and in case banks believe that this low level will continue in the future, it should be cheaper for banks to build up an infrastructure to stock it.
We think that there is actually a lower limit of the interest rate which stands by the cost of the cash holding, and we assume it to be around 1%. Hence, we think the way for more rate cuts which will be sustainable for longer time is limited. Right now I do not think that level of the Franc alone will be sufficient for the SNB to go into this rather unknown scenario which is connected with lots of risks.There is a chance of more FX interventions due to the comment regarding the overvaluation. However, the SNB could actually be happy with levels of 106-107. The Swiss central bank has been living with the overvalued currency for years, and why should they now act all of a sudden? We have heard these comments before; however, there is no reason to believe they have any meaning this time.
What events will determine the Swissie behavior in Q2 of 2015?
The Swiss Franc will be largely affected by ECB's quantitative easing. We will have some depreciation pressure on the Euro, which will not be limited and ultimately reflect on the EUR/CHF pair. In particular, I would say the SNB is not really willing to ease much further, which is why they have stopped defending the minimal exchange rate. Furthermore, I would like to mention the deflationary pressure in Switzerland, as we already witnessed the negative scenario before they exited the cap. Thus, we expect the economy to go into an even deeper negative territory, which would eventually introduce some appreciation to the EUR/CHF.
What are your forecasts for EUR/CHF and USD/CHF for Q2 this year?
Due to the strong deflation and downside pressure from the Euro side, for the EUR/CHF we are expecting something around parity by the middle of the year. Talking about the USD/CHF we anticipate it to trade around 0.91.