There is a lot of expectation around tomorrow’s Swiss National Bank (SNB) meeting, and either outcome could jolt the Swissie. A lot has happened since the last time the bank has met, or at least traders are behaving like they think so. Which has upended some of the expectations for what could happen.
Back in March, the central bank in Bern was the first of the majors to cut rates, and has recently been followed by Canada and the Euro. So, there is some broader expectation around whether the Swiss National Bank (SNB) will keep leading what is seen as a broad global trend towards easing. Given the Franc’s position as an ultra safe haven, being backed in part by gold, the SNB’s actions could be understood as the gold standard for monetary policy.
It All Fits the Pattern
That the Swiss would be the first to pull the easing trigger isn’t all that surprising, given the history. Demand for the safe haven currency has been a constant headache for the Swiss National Bank (SNB), leaving it too strong. A too strong currency in general is a drag on any economy, but for the Swiss in particular, it’s an extra problem.
The alpine nation relies heavily on its financial industry, so having a high-cost currency would add friction into financial trading. The second most important aspect of the economy is exports, concentrating in high-end technology products, which would also be hurt by an overvalued currency. So, the SNB has been in a constant battle to deprecate the Franc, particularly with respect to the country’s largest trade partner, the Euro Area.
Surprising the Markets
This is why recent comments from SNB President Thomas Jordan were a bit unexpected for the markets, and jolted the currency. The move was so big, in fact, that some traders suspected intervention. Jordan said he saw an upside risk from inflation, particularly driven by the too weak Franc.
It’s surprising because Switzerland didn’t have the same high spike in inflation over the last couple of years that other countries had. Annual CPI hit 3.5% and then receded, and has been within target all through this year. But the services sector CPI has been creeping higher, and popped above target last month. And it’s the services sector’s price increases in a tight labor market that has been the bane of rate cuts around the world, and is cited for one of the reasons for the Fed’s constant delay in easing.
What it Means for the Markets
With the main CPI figure for Switzerland below target, the market is pricing in as much as a 73% chance of a rate cut tomorrow. The currency has been weakening in anticipation, but if the SNB actually does go through with it, there is still some more weakness that’s possible.
On the other hand, there is a strong possibility that the SNB “punts” the decision for one more week, given the ECB’s reluctance to do further rate cuts and the inflationary pressure from FX. That exposes a substantial upside risk for the Franc. And given that there is no solid consensus, the market could push the currency substantially either way, because it would still count as a surprise for at least some traders.
