FX CURRENCY WATCH
to intervene on the exchange rate if needed, in order to prevent an undesired appreciation. Te SNB explained that – although the overvaluation of the franc has continued to decrease following its recent further weakening – the Swiss currency remains “highly valued” (Fig. 5), and added that “a renewed a ppr e c i a t i on would still be a threat to price and economic developments”.
Te trend of inflation remains weak in Switzerland as well. Te SNB has revised up its inflation forecasts from 0.4% to 0.5% in 2017 and from 0.4% to 0.7% in 2018, but only prompted by the rise in oil quotations and by the further weakening of the franc, while leaving unchanged its projections for 2019 at 1.1%. For what concerns growth, the domestic economy is expected to accelerate in 2018 to 2% from 1% estimated in 2017, on the improvement of the global economic picture, accommodative monetary conditions at the domestic level, and the weakening of the franc., while leaving unchanged its projections for 2019 at 1.1%. For what concerns growth, the domestic economy is expected to accelerate next
30 FX TRADER MAGAZINE January - March 2018
year to 2% from 1% estimated this year, on the improvement of the global economic picture, accommodative monetary conditions at the domestic level, and the weakening of the franc.
constant, on the other hand the ECB, by the end of 2018 (very beginning of 2019 at the latest) will terminate its asset purchase programme, thus implementing the first phase
of
the normalisation process (the second will be the opening of the interest rate hike cycle, no earlier than 2019), accompanied by a widening of yield differentials between the euro area and Switzerland.
The SNB explains the recent decline of the Swiss franc with the reduced need to resort to safe havens
Te expected improvement of the growth picture, however, does not allow for a change in the policy combination, both because the target is on inflation, and because any changes, even marginal, in the direction of a normalisation (i.e. a potential rise in interest rates) would push the franc up against the euro. Terefore, the SNB will leave rates unchanged at least until the ECB does the same, which suggests the Swiss franc should weaken further against the euro in the course of 2018, towards EUR/USD 1.19-1.20 on a one-year horizon, as while the SNB will keep its policy parameters
With no compromise to the underlying expected trend, a temporary modest strengthening of the franc in the opening months of the year cannot be ruled out, in view of the Italian elections
– expected to be held in the spring – and therefore in function of a potential resurgence in political risk (fears of euro- sceptic forces prevailing). In the near term, the franc could strengthen also as a result of the (contained) expected pull-back of the EUR/USD (positive correlation between EUR/CHF and EUR/USD) in function of the favourable developments in the United States (ongoing Fed hikes and approval of the tax reform) which should support the dollar across the board. Upside (temporary) on the franc should in any case remain contained to within the EUR/CHF 1.15-1.13 range.
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