CHF: SNB Holding Its Breath; How To Position?
Euro area politics have put the SNB under pressure as it once again finds itself between a rock and a hard place, caught in what seems to be a never-ending cycle of political event risk. The policy challenges look set to continue and in the meantime, the CHF will remain an overvalued currency.
Looking ahead, we expect no policy action at the SNB’s 16 March meeting, but the date is significant, coming one day after the Dutch general election (15 March).
In the meantime, FX intervention will remain the central bank’s main policy tool to alleviate some of the pressure on the CHF on the back of Euro area election calendar risks. However, we sense a subtle change in tactics by the SNB in recent months and a notable decline in verbal rhetoric. A deposit rate cut remains an instrument of the last resort, which we do not expect to be deployed at this stage. There is no quick fix. Damage control is the main goal of SNB policy. The economy is not ready for yet another exchange rate shock. Looking for opportunities to buy EUR/CHF topside. We doubt that the SNB will have the policy ammunition or indeed the appetite to engineer a reversal in the fortunes of EUR/CHF during the current phase of heightened political risks unless the decline in EUR/CHF becomes disorderly or decouples from the broader moves in EUR crosses. Given that the SNB is still managing the depreciation in EUR/CHF, selling rallies is unlikely to provide healthy risk reward. Instead, we are looking at opportunities to enter into long EUR/CHF via options structures that take advantage of the heavy skew in favor of EUR puts. We think that opportunity may come in the coming weeks. The Dutch General election on 15 March is attracting less attention than the French Presidential elections, but we believe the signaling effect from the result may be significant.