With the ECB sounding more hawkish midway through last year, expectations of an eventual shift in policy by the SNB were building.
However, despite announcing an end to QE as was long signaled, the ECB has made it clear that intends to be far more patient when it comes to tightening interest rates.
Draghi has now frequently referred to the growing downside risks facing the eurozone. With the ECB president highlighting the need to monitor incoming data as well as the development of key global issues, the market has begun moving out its pricing for the first ECB rate hike of the cycle from post-summer 2019 (as the ECB had originally projected) to 2020.
With this in mind, the SNB is unlikely to lift rates over 2019, wanting instead to wait until the ECB has done so first. Following an upward revision to the SNB’s interest rate forecasts in the early part of 2018, it seemed that the SNB was readying itself for a shift in policy. However, the explosion in the intensity of the trade conflict between the US and China caught the central bank somewhat off guard.
SNB’s Jordan issued a statement saying that in light of the trade wars and the upside currency risk it presented to the Swiss Franc from safe-haven inflow, the SNB would maintain an easing presence in the market. Jordan also mentioned that the SNB stood ready to intervene as necessary to prevent any excessive currency strengthening.
Trade Wars Keep CHF Upside Risk
News of a truce between the US and China late last year provided a healthy boost for risk sentiment as both sides agreed to 90-day talks to secure a trade deal.
However, with the March 1st deadline looming and reports noting that considerable differences remain between the two economies over trade, the threat of a further escalation in trade tensions is real.
Trump has reaffirmed his message that if talks fail to deliver a positive result, he stands ready to increase current tariffs on $200 billion of Chinese goods from 10% to 25%. He has also said that he is prepared to apply tariffs to the remaining $267 billion of Chinese goods entering the US each year.
Domestic Data Highlights Issues
Domestic data has recently done little to suggest that the SNB should be in a rush to normalize monetary policy. Inflation remains subdued, with the negative impact of the decline in oil prices still weighing, and Swiss exports have been weaker also.
Domestic demand has remained resilient, helping to offset some of these negative factors. However, the upside threat to the currency from on-going eurozone political risk factors and the continuing global trade war saga means that the SNB is unlikely to change its policy approach anytime soon and rates are likely to be on hold over 2019.
Technical Perspective
On the last two tests of the 1.1174 level, EUR/CHF has been strongly rejected, suggesting that this is a line in the sand for the SNB, with the rising trend line from 2017 lows coming in ahead of the level, as well as a retest of the broken bearish trend line from mid-2018. To the topside, bulls need to see a break of initial resistance at 1.1448 ahead of the key 1.1496 level needed to signal a proper bullish shift.