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Deutsche Bank: Policy Tools Now Becoming Clear

SNB
  • This rate hike will come as a considerable surprise to the domestic market in particular, where expectations for any policy change today had been minimal going into this meeting.
  • Second, and perhaps even more important, the SNB made explicit the change in its FX policy stance we have been highlighting over the last six months.
  • The policy statement and especially remarks in the press conference signal a shift to a "two-way" intervention policy, with an explicit readiness to sell down FX reserves in case of an unduly weakening Swiss franc. Effectively, the SNB has put an official cap on EURCHF. This cap remains unquantified for now but in our view should be assumed to be around 1.05.
  • Combined with the large rate hike, the signal to the market is even clearer than it has been in recent months: the SNB now desires a stronger Swiss franc. The rationale is clear: to prevent the transmission of excessive inflation from the Eurozone.
  • The tools are also now clear: coming out of negative rates as soon as possible and potentially drawing down the $1 trillion pile of FX reserves on the balance sheet. In our view, the bullish signal for CHF could hardly be clearer. We remain long against both USD and EUR and GBP.
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