Cryptic Swiss Central Bank Prompts a Pullback in Rate-Cut Bets

(Bloomberg) — Central bank opacity is the norm in Switzerland, but it has left investors the most uncertain about policymakers’ next step since they switched to easing.

Bets for the June 20 meeting have shrunk in the past month from around an 80% probability of a cut to a coin-toss between easing on the one hand, and a hold on the other. UBS Group AG, the country’s largest bank, flipped its prediction for the meeting to a hold from a reduction earlier this week. Options contracts, meanwhile, show expectations for swings in the Swiss franc next week are the highest in nearly two months. 

Some of the volatility is down to the broader European turmoil after French President Emmanuel Macron’s decision to call a snap election roiled markets this week. But ambiguous comments on currency interventions by Swiss National Bank President Thomas Jordan have divided markets watchers.

“The SNB’s messaging has not been exactly consistent with the message set out during the March monetary policy report,” said Geoffrey Yu, senior strategist at Bank of New York Mellon. “It is difficult for markets to establish consensus on the path of the SNB in the near term.”

The SNB’s surprise cut in March — which made it the first major central bank to reduce rates — dealt a calculated blow to the franc. But its thinking now appears much more murky. 

Speaking in Seoul late last month, Jordan said a weaker franc is currently the most likely source of higher Swiss inflation, and suggested that interventions could be used to counter it. Some said the comments set out a hypothetical situation, others braced for market interventions to strengthen the franc.

The confusion has fed through into bets on the direction of next week’s meeting: The central bank might be less inclined to reduce its key rate from 1.5% if it views the franc as too weak.

Jordan’s comments helped push up the franc more than 2% versus the euro, and triggered a jump in short-dated volatility to its highest since April.

For Bloomberg Economics’ Maeva Cousin, Swiss economic data and the central bank’s inflation forecasts are proving resilient, and point to a hold next week. 

What Bloomberg Economics Says…

“Given the SNB sees upside risks to that forecast, we think it would be uncomfortable bringing it closer to the target’s upper bound. Policymakers may prefer to wait until some downside surprises to price gains materialize, so that they can cut rates without lifting the inflation projection.” 

— Maeva Cousin, senior economist. For the full view, click here

While the European Central Bank telegraphed its recent cut months in advance, the SNB has kept silent on its policy outlook, in line with its practice of giving neither forward guidance nor minutes of officials’ meetings. Jordan has defended the central bank’s opaqueness as “right for our situation.”

Charlotte Ong, European currency strategist at HSBC, said Friday that the SNB’s currency reserves data suggest it might have switched to buying the franc, or may have at least eased sales.

“An active ‘weak Swiss franc’ stance from the central bank was unsustainable,” Ong wrote in a note. “Especially given that price pressures stay sticky and the franc remains vulnerable as a popular funder for carry trades.” In a carry trade, investors borrow in currencies where rates are low and invest in assets in other currencies that generate higher returns.

Others insist Jordan was speaking hypothetically.

“I have the feeling that Jordan’s speech was interpreted a little out of context,” said Karsten Junius, chief economist at J. Safra Sarasin in Zurich, who forecasts another rate cut this month. “The SNB has no interest in intervening to support the franc at the moment.”

He believes that markets are pricing “far too little” a possibility of a cut next week. 

It’s a view shared by Sebastian Petric, head of FX research at LGT Bank Schweiz in Zurich. Still, both concede that they’ve been puzzled by the market’s response to Jordan’s speech. 

“I find this meeting quite tricky to call, and apparently I am not alone with this perception,” Petric said.

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