Yesterday (22/4) Swiss National Bank (SNB) mentioned that implementation of negative rates will be expanded to include sectors that was previously not included in the implementation of negative rates. According to some analyst, it indicates ineffectiveness of SNB moves in its attempts to manage CHF appreciation.

Swiss Franc weaken yesterday (22/4) against US Dollar and Euro after Swiss National Bank (SNB) mentioned that implementation of negative rates will be expanded to include sectors that was previously not included in the impelementation of negative rates, such as pension funds. According to some analyst, it indicates ineffectiveness of SNB moves in its attempts to drive out incoming funds that has supported CHF appreciation. As it is known, SNB has long been trying to depreciate the CHF, but it is stubbornly persisted; even after interest rates got cut down to negative, it stays below 1.05-1.10 CHF per Euro, levels at which SNB rumoured to favor.


Swiss
 

Still Safe Haven

Switzerland is famous for its high quality products, but they saw their product prices soared and lost its competitiveness because of their own currency strength. But Swiss Franc itself is known as safe haven currency  that is always be the place to run to when other assets became increasingly risky. In the situation where its neighboring Euro suffers under turmoils and uncertainties, Swissy became the place where investors parked theit funds; thus CHF appreciation is inevitable.
 

Since SNB scrapped Euro peg in January, the central bank has been trying to depreciate its own currency; starting from intervention, rate cut, up to yesterday's expansion of negative rate's implementation. Even so, Swiss Franc stay strong; and many in the options market expect the situation will go on for longer. SNB move to scrap Euro peg has put CHF directly in the face of ECB stimulus impact; instead of channelling their funds to Euros, investors prefer Swiss Franc-denominated assets. Consequently, Swiss exports declined, inflation plunged further, and Swiss stocks lagged.

 

Data

Swiss economic data. Above: Swiss exports for March 2014-February 2015. Below: Swiss inflation rate for April 2014-March 2015.
 

SNB deposit rate at -0.75% now is already far below ECB deposit rate at -0.2%, but funds continue to flow from Euro to Swiss. The problem is, uncertainties about Greece debt issues means that Grexit is still a possibility to be considered. Add that with the still stalled Eurozone recovery, and the 18-country currency became increasingly unattractive. Instead, ECB stimulus became the source of new problem for SNB if funds that are supposed to go to Eurozone came to CHF.
 

Although Swiss Franc weaken after yesterday's announcement, but analysts predicted it will only be temporary. Even when exports under pressure, Switzerland still owns large surplus of trade and current account balance. February 2015 figures showed trade surplus at 2,472.61 million CHF and current account surplus at 17,343.31 million CHF; notably over-average number compared to other big economies.

 

Awaiting Eurozone

In the circumstances, further rate cut may not be possible to be done by SNB. Theoretically, rate cut can weaken currency exchange rate, but as could be seen now, Swiss Franc status as safe haven unwavered although rates has been cut into super low. Contrarily, further rate cut will be more risky as it potentially hurt Swiss financial services and banking sector that is one of its economy's main contributor. It seems that the best steps SNB can take are defending the current record low rate and intervening constantly while waiting for Eurozone economy recovery to go well underway and for Greece debt issue to come into an acceptable solution.
 

ECB presient, Mario Draghi, claimed stimulus program has bore fruit and committed to follow through with the program until at least Spetember 2016. However, Greece debt issue is still there and Grexit threat foreshadows continuing uncertainties. It seems, for a short time forward, Swiss will have to take karmic rewards after its previous Euro peg scrapping resulted in an explosive boom in the forex market.

 

Is Recession Ahead?

Swiss inflation rate in March was -0.9% (yoy), its lowest since mid-2012. But SNB expected it to drop further, up to -1.1% this year and will only come back up in 2017. Nevertheless, as mentioned before, things seems not conducive for SNB to cut rates further or push growth with stimulus. It can be said that the SNB has been cornered.
 

Bloomberg survey on some economists that was published yesterday revealed a rather grim projection. Swiss output suffers worst setback since 2008-2009 financial crisis due to slumped exports. Furthermore, Swiss GDP for the first quarter of 2015 is expected to contract -0.1% and further in the next quarter to -0.2%, thus push Swiss to enter its first recession in more than five years. Swiss main dilemma now is Swiss Franc appreciation against Euro that hit its exports. Although analysts did not see a particularly bad recession, but there will still be a bit of contraction. Is this true, or not? We will have to wait a while for the actual figures, because Swiss GDP report for the firsth quarter of 2015 will be released next month at 29 May 2015. Before that, we other datas, such as trade balance, possibly can fire or calm the issue.