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Goldman Sachs: See Strongest Signal Yet That Era of Weaker FX is Over

SNB
  • We see a strong possibility that the SNB will hike on Thursday in what would be the strongest signal yet that the era of targeting weaker exchange rates is over. The rising inflation outlook makes it more likely the SNB will tolerate, or even encourage, CHF strength in response.
  • After a decade of guarding against currency appreciation, Switzerland has built substantial ($1tn) FX reserves that could also be used to stabilize the currency. This would likely be in conjunction with policy rate hikes, in our view, but does add a layer of complexity when judging the exact policy mix the SNB will choose at the start of the normalization process.
  • Swiss policymakers have been unusually vocal in the run up to this meeting, and in particular have highlighted that they will not hesitate to hike if inflation proves more persistent than anticipated.
  • We think policymakers will not only tolerate but likely want to see some nominal exchange rate appreciation. That might make them hesitant to open the possibility of a 100bp policy rate differential with the Euro Area by the time of the SNB’s September policy assessment.
  • Because rate increases from -0.75% to zero will likely be more effective to stabilize CHF than directly restrain the domestic economy, the question of the optimal policy mix beyond 0% policy rates becomes less clear.
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