SNB Up Next
On Thursday, the SNB will meet to broadcast their monetary policy strategy. In the light of higher domestic inflation, ECB “normalization” signal and mounting political risk in Europe, this generally sleepy meeting should get additional attention. At the March meeting the SNB held sight deposit rates at -0.75% while reiterating the bank would remain active if necessary in the foreign exchange market. We anticipate a broadly dovish communication, particularly in the light of recent ECB forward guidance. Since the last statement, the CHF has generally appreciated ensuring that the “highly valued” term will remain. In addition, uncertainty in Europe, specifically in Italy will keep the SNB vigilant. We suspect that the near term inflation forecast and growth assessment will remain unchanged despite clear improvements.
Firstly, the SNB will avoid sparking any speculation that might cause CHF to appreciate. Secondly, global growth and macro backdrop are a cause for concerns for the small alpine economy, which will provide plenty of coverage for the SNB. Interestingly, the SNB has expressed concerned over overheating of the housing markets. Even suggesting a need for a price correction. We are uncertain how the SNB will handle this issue.
However, Swiss general economy continues to surprise to the upside. PMI are running above average, while GDP growth is coming off a strong 1Q. We continued to see the SNB as one of the last G10 movers towards normalization. Our call is for the first interest rate hike, is September 2019. This forecasts is based less on the trajectory of Swiss inflation and more the ECB policy path. We anticipate ECB asset purchase will end in 2018 and first rate hike March 2019. This give the SNB six month to judge the markets reaction on Euro before preceding. The significant lag between G10 central banks and the SNB and excellent candidate for global funding currency, suggests that risk rewards trade-off for the EURCHF remains to the upside.
Italy’s trade balance drops in April as further uncertainty looms
Under strong uncertainties with regard to recently formed coalition of both the League and the 5 Star movement at that time, Italy’s April trade balance strongly decreased, given at EUR 2’938 million (prior: EUR 4’531 million), due to a strong increase in imports (+0.70%) while exports remained flat (+0.10%). On equity side however, the outlook is rather different, as Italy’s FTSE MIB surged by 7% (year-to-date: -0.28%) during the single month of April, an impressive rise compared to Europe’s leading blue-chip index Euro Stoxx 50 which rose by +5.21% (year-to-date: -2.28%) during the same period.
One could think that the situation improved since the Italian government was officially built, however the truth is very different. Indeed, investors’ concerns with regard to budget extension are confirmed, as recent rumours confirm that Finance Minister Giovanni Tria will be willing to renegotiate a balanced-budget target extension by 2021 from 2020 expected during EU summit in Luxemburg on Thursday. Italy’s government priorities will also be discussed on this occasion.
Accordingly, as continued fears among EU countries continues (e.g. Germany/EU immigration disagreement, Brexit-EU divorce), we would expect further weakness with regard to the EUR/USD for the ongoing week. Currently trading at 1.1586, the pair is expected to decrease along the 1.1565 range in the short-term.
