The Swiss franc has weakened against the euro and USD as politics in Italy and Germany regressed to 'normality'.
US President Trump's protective tariff failed to trigger a hyped 'trade war' and geopolitical tensions decreased. A weaker CHF will allow SNB members to sleep a bit easier. At their 15th March quarterly monetary policy meeting the Swiss bank is likely to maintain their current policy mix. The Swiss economy continues to expand at a decent clip as Q4 2017 real GDP quickened by 0.6% q/q. Q1 2018 should see further expansion as the ICO collects revenues from the Olympic games, plus late heavy snowfall boosts consumer spending, saving the winter season.
Yet the deciding factor for policy steering at the SNB remains the weak underlying inflation trend. The sharp depreciation in CHF helped import inflation at core level from -0.3% to nearly 1.0% in a year. However, strong CHF have now pushed core back down to 0.5%. The lack of consistent inflation dynamic will provide SNB coverage to keep policy rates negative and stand ready to intervene physically if necessary (rally of EURCHF above 1.17, will suggest it is no longer overvalued).
The SNB policy continues to be extremely profitable. Meanwhile, the SNB turned in bumper results for 2017: profit of CHF 54.4 billion, up 29% from 2016, with CHF 49.7 billion earned in foreign currencies and CHF 3.1 billion from gold holdings.
The central and the cantonal governments will be cheering, because they will share a profit distribution of CHF 2 billion. This was the SNB largest profit in 100-year history. Given inflation dynamics and volatility in CHF we don’t see the SNB in any rush to adjust policy. Speculations of exit is just premature. Most likely adjustment will be in Q1 2019, well after the ECB increased their policy rates. Due to the SNB's policy stability and encouraging macro backdrop, we remain negative on the CHF.
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