CPI surpises to the upside
In October, CPI contracted 1.4% on a year-over-year basis, as the effect of the peg removal endures. On a month-over-month basis, inflation level rose 0.1%, beating market expectations of a flat reading. This improvement came against the backdrop of a weaker Swiss franc which is making foreign goods more expensive for Swiss people – the price of foreign goods increased by 0.8%m/m. When looking at the core gauge, inflation rose 0.2%m/m, while on a year-over-year basis prices contracted 0.8%.
Limited option for the SNB.
In spite of this slight improvement, we do not believe the underlying story has changed as the strong Swiss franc continues to weigh on the Swiss economic and inflationary outlook and it is about to get worse. The ECB’s stated intention to support further the EU economy is certainly keeping SNB’s officials awake at night especially given the limited number of weapons in their arsenal. What are the possible ways in which the SNB can react? Let’s do a quick review. We can almost certainly rule out a potentially massive FX intervention as the central bank’s balance is already at stratospheric levels. Secondly, we don’t believe it’s likely that there will be a tightening of the exemption rule since it would directly impact the saving accounts of Swiss people. So what could happen? From our standpoint, the SNB will most likely respond by pushing rates further into negative territory and we believe that Mr. Jordan could combine such a measure with a raise of the exemption threshold. On the medium-term EUR/CHF remains in its declining channel, while on the short-term we do not rule out a temporary appreciation of the euro.