In a decision that came as shock to the market, this morning the Swiss National Bank (SNB) raised its policy rate by 50bp to -0.25%, its first rate hike in 15 years, against unanimous consensus of no change, and a dramatic move that sent the franc surging more than 2% against the euro, bringing parity between the two currencies into view.
While Goldman had flagged a strong possibility of a hike, the magnitude of the hike – 50bp rather than 25bp – was also a surprise to market expectations. But the true bombshell is that as part of the decision, the SNB also adjusted its language on potential currency intervention by dropping the one-sided commitment to guard against currency depreciation, implicitly signalling the potential for foreign asset sales to further strengthen the Franc. This is a problem for US stocks because as the bank's latest 13F filing shows (yes, the SNB files its stock holdings like any other hedge fund), it owns some $177 billion in US stock (and hundreds of billions in other securities), which it may now proceed to sell to keep the Swiss Franc stronger. In his press conference introductory remarks Chairman Jordan also reversed the previous stance on the currency, saying that the "Swiss franc is no longer highly valued".
“We do not exclude further rate hikes, but we are also not in the business of forward guidance,” Jordan told Bloomberg when asked about the path for rates. “We should not underestimate the risk of high inflation.”
Going back to the statement, the inflation forecast was revised up significantly over the entire forecast horizon, while the SNB's growth outlook for this year remained unchanged.
Given the SNB's hawkish surprise today, Goldman now looks for three further 50bp hikes in September, December and March next year, followed by one further 25bp hike in June of next year for a terminal rate of 1.50%.
The franc’s appreciation put it on course for its biggest rally since January 2015, when the SNB removed its cap on the currency. As with Thursday’s surprise, that was also a shock decision.
The SNB actions pre-empt a hike in the neighboring euro area. The European Central Bank — whose stance the SNB has tended to follow — will only start next month, with another to follow in September. Traders cranked up bets on ECB rate increases after the SNB’s move, sending euro-area bonds tumbling. That’s a headache for the ECB, which was already forced to hold an emergency meeting Wednesday because of a jump in yields in some euro-area countries.
The SNB has long battled against the strength of the haven franc, but the latest actions mark a major pivot. While it will remain “active” in the currency market, the central bank didn’t repeat its long standing description of the franc as “highly valued.” The SNB also provided a two-way option for interventions. Not only is it ready to step in against excessive appreciation, it also threatened to sell the franc if it weakens. The SNB can act in “both directions,” Jordan said.
"They have made a complete U-turn in their currency management policy," said Francesco Pesole, a currency strategist at ING Groep NV, who forecasts the euro-Swiss franc pair moving as low as 0.98 francs per euro over the coming quarters.
“A lot of macro investors — including ourselves — will now be eyeing Swiss franc longs in a world where the SNB is hiking rates and global recession risks are intensifying,” said Viraj Patel, macro strategist at Vanda Research. “We wouldn’t be surprised if the next few months is all about testing the SNB’s pain threshold for a stronger Swiss franc.”
As for liquidating its massive stock portfolio, given the SNB's preference for tightening the monetary stance through the policy rate rather than the balance sheet, Goldman expects the SNB to only gradually unwind its asset holdings, without a pre-announced path.