Much has been made of the Swiss franc’s epic plunge.
And indeed, it has been just that – an epic plunge. If you’ve missed our previous posts on this, you can read some of them here.
Just to underscore the contention that our ongoing coverage of the story isn’t hyperbolic, have a look at this chart:
The move was, quite simply, unprecedented since the SNB abandoned the floor.
Now consider this from a BofAML note out Wednesday:
Summer months can be unpredictable for FX markets and 2017 has been no exception so far. While summer 2015 was dominated by the China devaluation story, 2016 by GBP and the impact of the Brexit Referendum vote, summer 2017 has so far been dominated by the sharp depreciation in the Swiss Franc.
We would classify this as a “surprise” because the scale of the move over the past month has been unprecedented since the SNB abandoned the EUR/CHF peg in January 2015 and because it appears to have lacked an immediate catalyst.
Right. “It appears to have lacked an immediate catalyst.”
Or maybe that’s not entirely accurate. Maybe the better way to think about it is that the catalysts have been largely exogenous. That is, this seems to be almost entirely attributable to expectations for ECB tapering and, more immediately, the assumption that more hints about that effort will be dropped by Mario Draghi at Jackson Hole.
Here’s an annotated chart to that effect from Goldman, who notes that a series of ostensibly euro-bullish events and rhetoric have likely fueled the EURCHF rally:
As you can see, there are really only two “uniquely Swiss” events in there.
Of course this is welcome news for the SNB – something we’ve been keen on noting as this whole story has unfolded and something Thomas Jordan said explicitly late last month in interview with newspaper Le Temps. Here’s a bit of color from Goldman:
We think SNB policy makers have viewed overall financial conditions in Switzerland as excessively tight of late: the lack of room for manoeuvre at the SNB (given already deeply negative policy rates) has made the Swiss Franc “significantly overvalued”.
On that basis, the recent Franc depreciation is likely to be viewed by the SNB as a move towards a more appropriate level. In our view, the impact of the depreciation on the economy is therefore unlikely to be unwound by a more ‘hawkish’ approach to policy rates at the SNB in the near term (the front end of the CHF forward curve has not responded strongly to recent FX moves).
And if you’re wondering whether the recent 3% depreciation is enough to make the SNB think twice about its accommodative policies, the answer is definitively “no.” Here’s Goldman again:
We find that the 3% depreciation in the trade-weighted Franc over the past week, if sustained, could boost the SNB’s inflation forecast by 0.2pp (to +0.5%) in 2018 and by 0.1pp (to +1.1%) in 2019. In our view, this boost to inflation looks too small and starts from too low a base to trigger a policy reaction (bearing in mind that the SNB has repeatedly overestimated the profile of headline inflation in the past years.
Of course if they did want to tighten policy, what they could do is hold off on rates and start unwinding this instead:
The beauty there is that they get to realize a profit on all the foreign currency holdings they’ve amassed over the years in the course of intervening to keep the franc from rising too much.
As UBS’ chief economist Daniel Kalt notes, “they may generate 40-50 billion francs in profits over three years, not just on the books but real profits if the franc weakens further and the SNB can slowly unwind its balance sheet.”
There’s no word on how that would impact your Apple shares…
