SNB December 15th

The Q4 SNB meeting on December 15^th is widely expected to be a non-event with the bank remaining on hold and warning against excessive CHF strength. However, there are still opportunities around the meeting. Over the last eight SNB meetings, the market has paid out around 72bp cumulatively on concerns that more cuts are forthcoming.For now, seemingly, the SNB are content to remain on hold unless FX markets force their hand.

However, one story that has flown somewhat under the radar is that of the SNB’s FX reserves which have been moving steadily higher. The latest data for November showed that intervention was to the tune of CHF21.5bln whilst reserves are now at CHF648bln; 31% larger than before the currency peg was removed. Provided that the SNB maintains their “leaning against the wind” policy, then CHF strength should be limited, especially in the context of the “Trumpflation” trade which should weigh on low-yielders such as JPY, EUR, and CHF over 2017.

SNB To Remain On Hold Over 2017

2015 saw the SNB’s currency peg removed and rates cut to a record low of -75bp. However, 2016 was a largely uneventful year for the Swiss Franc with the SNB keeping rates on hold and merely reiterating that the currency is too strong and they would act if necessary. The bank’s stance makes sense given that the recovery in inflation remains fragile and still in the deflationary territory at -0.3% on the year and in decline again.

This is a theme which looks likely to continue over 2017 with negative rates to remain in place until the ECB begins reversing its own monetary policy stimulus and exits a negative interest rate regime.Given the ECB;s recent announcement that they intend to extend QE until at least December 2017 it seem reasonable to expect that this won’t be happening until 2018 at the earliest.

SNB Intervention Over 2016 Capping CHF Strength

Over the course of 2016, data shows that the SNB’s intervention in currency markets has amounted to monthly purchases of around CHF71bln. This number is quite significant when compared against 2015’s figure of CHF76.4bln which was over a year where the SNB were dealing with the removal of the currency peg. Brexit and the US elections are the two clearest examples of SNB intervention where the bank sought to cap the appreciation of CHF as global risk aversion led to safe haven demand. The spikes in intervention over those events were noticeable through the SNB’s reserves data. In November specifically, the CHF21.5bln worth of FX purchases clearly relate to the bank’s attempts to stem safe-haven in flows around the Trump election.

Indeed, consistent FX intervention is reflected in the price action. EUR/CHF has maintained the same 5% holding pattern with risk events fueling peaks and troughs between 1.06 and 1.12. The ECB’s announcement of further monetary policy stimulus keeps some pressure on the SNB to ease further, however in light of November’s FX intervention it is unlikely that the bank will choose to do so as early as the December meeting this week.

SNB Meetings Typically See Markets Pricing A Cut

Trading around SNB meetings over the last two years has broadly followed a similar patter, particularly in rates. The rates curve for each meeting which attempts to price in the possibility of a cut from the SNB over the next 3 months has seen traders consistently disappointed. It is typically this rates pricing dynamic that leads CHF strength over the 1^st hour after the SNB;s unchanged decision at each meeting. The patter is most evident when CHF short positioning is at extended levels. Ahead of this meeting, CHF positioning has moved short again with COT data showing net shorts currently of -25k contracts.

The difference this time, however, is that CHF short positioning is not solely an SNB story and reflects the global “Trumpflation” trade. In this context, CHF might strengthen slightly in response to a minor rates market disappointment, but it is unlikely to be a significant catalyst for any directional move as the global yield curve steepening still applies and should weigh on low yielders over 2017.

2017 To Be A Tricky Year

Looking ahead to 2017 there is clearly plenty of European political risk which should feed uncertainty and translate into support for CHF. However, with Trump’s policy mix likely to fuel higher US yields, CHF is likely to weaken give its role as a funding currency and being more sensitive to US yields than EUR. The latter is likely to be the most important driver for CHF over 2017 though European political risks could see periods where CHF is pulled in either direction accordingly.

For now, price remains in the upper end of the wedge formation that has framed price action over the last five years. The next key test for USD/CHF will be the 1.0318 2015 high with trend line resistance coming in just above.