SNB to fight CHF strength with all means, possibly incl. QE
Trust the ‘SNB put’: won’t allow dips much below 1.05 in EUR/CHF
We buy EUR/CHF spot for a 1.1000 target, stop at 1.0250
Strategy
With EUR/CHF just below 1.05 we are around the level where the SNB should be alert to further CHF strength; the recent drop in USD/CHF further aggravates the situation. First line of defence against CHF strength has so far been intervention and indeed the SNB has re-iterated on several occasions recently that the central bank remains ready to sell CHF, if necessary. Further rate cuts remain a possibility as well and the SNB is currently not too worried about adverse effects of negative rates but with key policy rates at -0.75% we are at levels where most central bankers are not too keen to cut further. Notably the Danish experience suggests that this is close to a de-facto lower bound for rates.
SNB is not avert to unconventional policy tools and with two SNB members this week saying that the central bank is considering the possibility of easing Swiss monetary policy by means of a foreign-currency asset-purchase scheme as suggested by the IMF, we are now closer to a form of quantitative easing (QE) in Switzerland. In our view, announcing a target for asset purchases would be a neat way for the SNB to pre-commit to a certain amount of monetary easing and foster a sustained weakening of the CHF. With limited scope to buy domestic assets, the SNB will likely have to look abroad – and the IMF has now given its nod to this. The SNB has proved its willingness to act in between policy meetings and use unconventional policy tools. As a result, we recommend buying EUR/CHF for a 1.10 target, relying on the SNB to bring about CHF weakness.
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