As many have been suspecting all along, the political game involving the ouster of now former SNB president Philipp Hildebrand has been nothing more than a game of "pin the tail on the scapegoat" for bad monetary policy by the SNB, read the EURCHF 1.20 peg. In other words, it is quite likely that alongside the burgeoning SNB balance sheet, the bank had also accumulated quite a few losses, which the Swiss public will not be too happy with, and a change at the top was required. So what happens next: will the SNB relent and allow the peg to expire as the scramble for a (now much more diluted) CHF resumes ahead of the European D-Day in March, or will the peg be forced to be pushed even higher, at the expense of even greater balance sheet losses? Here is what SocGen thinks will be the next steps.
EUR/CHF: will the SNB have to make a move?
The EUR/CHF has been weakening steadily over the past month and is now back at the low end of the 1.2125-1.2475 range, which is within the level since mid-September and the last limit before the 1.2000 floor implemented by the SNB on 6 September.
Upside pressure on the CHF has underpinned the stressful climate in the eurozone, despite the control system set up by the SNB and reduced global risk aversion mainly attributable to better US figures. The markets are waiting for the implementation of the measures agreed on at the end of last year (Merkel-Sarkozy meeting today); the situation in Greece is still a big concern (EUR15bn reimbursement on 20 March and discussions under way with the Troika); the budget outlook remains fragile overall (impact expected from the potential recession); and sovereign spreads remain stretched (notably for Italy at 520bp).
The initial reaction following Hildebrand resignation today was almost limited above 1.2125 even if the global tone for the CHF remains solid. A drop through the 1.2125 zone would open the door to the 1.2000 level. This threat would then force the SNB to react via market intervention. The Central Bank said today it will defend the 1.20 level with “utmost determination”.
At the end of the day, the likelihood of raising this floor is expected to grow as deflationary pressure increasingly threatens the Swiss economy. Global CPI has reached -0.7% yoy and core CPI is collapsing towards a historical level of -1.1% yoy (whereas the situation is stabilising in the eurozone). At the same time, manufacturing production is down for the first time since June 2009 (-4.3% yoy). In the highly uncertain economic environment with specific deflationary risks for Switzerland, and given the current evolution of spot rates, authorities are very likely to have to contend with raising the floor to over 1.20 in the short term.