SNB expected to hike rates out of negative territory

• Swiss National Bank to announce rate decision on Thursday, 8:30 am BST

• SNB expected to deliver 75 bp rate hike and push rates into positive territory

• SNB shadows policy moves by ECB

• Lower frequency of policy decisions leaves scope for a surprise

• EURCHF tests lows from September 15, 2022

This week sees rate decisions from numerous central banks. While most of the attention will be put on decisions from the Federal Reserve (today at 7:00 pm BST) and Bank of England (tomorrow at 12:00 pm BST), there are also other noteworthy decisions. Riksbank announced its decision yesterday and was the first central bank from the developed world to pull the trigger on a 100 basis point rate hike. Another interesting decision is likely to be made on Thursday at 8:30 am BST when Swiss National Bank announces its policy decision.

What to expect from SNB?

The Swiss National Bank will announce its monetary policy decision tomorrow at 8:30 am BST. The Bank is expected to deliver a 75 basis point rate hike. This would put the main interest at 0.50% and would be the second rate hike this year following a surprise 50 bp rate hike back in June. It would also mean the end of negative rates in Europe as ECB and Danmarks Nationalbank already hiked rates into positive territory earlier this year and Riksbank did so at the end of 2019.

A 75 basis point rate hike tomorrow looks certain and priced-in so what's next? SNB is likely to keep hiking rates in order not to fall too far behind ECB, that is why we should expect some hawkish rhetoric. Inflation in Switzerland is quite low but still above SNB's target and the central bank seems committed to bringing it back down. A point to note is that while SNB is shadowing ECB's policy moves, ECB meets twice as often as SNB. This means that there is a chance that SNB will go aggressive and front-load hikes in anticipation of a ECB rate hike in-between its SNB decision meetings. Falling too far behind ECB could force SNB to go out of its way and make an inter-meeting decision but it is a scenario the bank would most likely want to avoid.

What about CHF?

Outlook for the Swiss franc can be seen as bullish. Negative rates did not discourage investors from investing in Swiss currency and assets, thanks to CHF safe haven status and high culture of banking services in the country, and a move out of negative territory by SNB will attract even more capital. SNB also does not seem to be concerned by excessive strengthening of CHF as it helps the country keep inflation relatively low. This is because a bulk of Swiss inflation is imported inflation and strong currency helps mitigate this effect. Swiss CPI inflation accelerated to 3.5% YoY in August, a level that many European countries can only dream of as inflation in the euro area exceeded 9% in August. However, as the ECB is on track to hike more, SNB will likely follow and it is also what market expects - a 3-month implied policy rate currently sits at 1.32% while a 6-month implied rate sits at 1.77% (compared to current pre-meeting -0.25% policy rate). This in turn should continue to provide fuel for CHF gains.

As strong CHF helps the country keep inflation low, one cannot rule out the announcement that SNB will be more willing to intervene in the FX market to shield franc against depreciation. Such an announcement would also support CHF, especially as SNB has a track record of interventions and large FX reserves facilitate such moves.

EURCHF is trying to break below an intraday low from September 15, 2022 in the 0.9530 area. No decisive break occurred yet but the exchange rate remains close. Note that 50- and 200-hour moving averages painted a death cross (orange circle). It is a bearish signal, although it often surfaces with a lag. Current sentiment, fundamentals and recent price action suggests that lower EURCHF exchange rate is highly likely. Source: xStation5