December SNB Rate Decision & Policy Statement

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Coming up, we have the monetary policy decision of the Swiss National Bank scheduled for 09:30 CET (3:30 EST). What traders are going to be scrutinizing is the quarterly monetary policy statement.

The latter is especially relevant since it gives some insight into where the SNB thinks the economy is going in the long term, something that investors are likely to be mulling over as the central bank largely goes silent over the year-end holidays.

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The consensus is that the Bank will keep the interest rate steady at -0.75%, so market moves will likely come from the policy report. Here are some things you might want to keep in mind if you are trading any CHF pairs.

General considerations

The SNB has a single mandate to keep prices stable, officially targeting an inflation rate of “less than 2%” annual, and no deflation. Realistically, the SNB has been struggling for a long time to get inflation up to a comfortable range, except for recently.

The last time that the inflation rate went up to 2% was late 2008. Since then, it peaked at 1.2% in August of this year and has since been drifting down to registering at just 0.9% in the November reading.

The other factor the SNB is concerned about, although it’s not officially part of their mandate, is the relative strength of the currency to others. This has a direct impact on the country’s exports and financial sector, so it’s a key element to the economy.

The SNB intervenes to keep the CHF index from appreciating too much, and they’ve mostly kept it in line. However, demand for the currency is defined by factors that they like, such as the relative growth of the Swiss economy, and factors they can’t control, such as the overall risk appetite of investors.

What We Are Looking For

What could have an impact on the market is if there is a change in the policy statement with respect to the one issued on Sept 20th, parsing the language in comparison to what bank members have said recently (all broadly in line with the prior statement.)

Key elements are:
– Inflation expectations: The last report showed the SNB expected year-end inflation at 0.9% (in line with November’s and we won’t get new data on this until January 9th).
End of 2019 inflation was seen at 0.8%, and end of 2020 in the range of 1.2-1.6%. If the bank ups those estimates in the report, that could be seen as increasing the likelihood of a rate hike; cuts would push the potential of a rate hike further into the future.
– Currency strength: The SNB is expected to reiterate that they see the CHF as highly valued and FX markets as still fragile. They are to remain ready to intervene if needed.
– Economy: The last report showed they expected the economy to grow 2.5-3.0% this year, with risks more on the downside

What traders are trying to gauge out of the report is when to expect the next rate hike, and that’s where the SNB is in a bit of a difficult spot. If they raise rates before the ECB does, this will strengthen their currency with respect to their largest trading partner, something they are keen to avoid. So, the expectation is that rate hikes are on hold until the ECB takes the lead, and they aren’t forecast to rise until the controversial defined “summer of 2019”.

A complicating issue is the divergence between the two economies, with the latest Eurozone GDP growth figure coming in at a mere +1.6% annual, continuing the slumping trend form the peak in Q3 2017 of 2.8%. To contrast that, Switzerland’s growth trend is in the opposite direction, rising to 3.5% annual growth in Q2 of this year, with the first drop back to 2.4% in the third quarter.

A growing economy is likely to push inflation up, increasing the chances of a rate hike; and while that would satisfy the mandate to keep inflation below 2%, it would increase the value of the currency, something the SNB is quite uncomfortable about.

To make matters worse, October’s trade balance included record exports, with the surplus peaking at CHF2.6B, the highest since January 2017, also increasing demand for the currency.

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