The BNS should proceed to a more aggressive monetary and the franc should drop by 5% against the euro in 12 to 18 months, advances Mathieu Savary, at BCA Research.
The franc appreciated slightly against the euro and the dollar after the decision of the Swiss National Bank (SNB) to reduce its guiding rates by a quarter of a point. For BCA Research, monetary easing is not yet finished. Mathieu Savary, chief strategist for Europe with this independent institute, answers questions from Allnews:
The drop in BNS rates by a quarter of a quarter was accompanied by comments indicating that the SNB would not lower its rates to less exceptional events. What do you think?
The BNS has reduced its levels by a quarter of a percentic and not half a percentic because there is no urgency to intervene more. She prefers to keep ammunition. In his comments, Martin Schlegel used a more “hawk” tone than expected. However, it was clear that it would not accept that the franc continues to appreciate itself. At BCA Research, we anticipate new upward pressures on European currencies, including on the Swiss franc. The BNS will then be forced to reduce rates and introduce negative rates later in the year.
Does BNS also refuse to introduce negative rates now to avoid its effects on banks? During the previous episode, had the banks’ margins were not put under pressure, which had led them to increase the costs of customers?
Banks have learned from the last negative rate period. BNS can set up various mechanisms on reserves, like the ECB and the Bank of Japan, to limit the impact of negative rates. According to our basic scenario, the SNB will avoid causing indirect damage to banks.
“The franc will lose part of its refuge value due to the deflation which threatens the Swiss economy.”
The franc reacted initially with a slight increase. What are your expectations on the franc?
This reaction hardly surprises in a context of strong volatility and tensions in the Middle East which push the franc upwards.
In the short term, with a downside-oriented dollar and conflict in the Middle East, a rebound in the dollar would not be surprising. But at 12 or 18 months, the greenback should drop. This movement will be accompanied by a continuation of the diversification of portfolios to Europe.
The franc will therefore continue to appreciate, bringing the SNB to lower its rates again. However, the franc forecasts are complicated by the fact that currency is the main vehicle for the transmission of inflation in the country. Without this relationship, we would reach an increase in the franc from 5 to 6% against the euro and 15 to 20% compared to the dollar. But the BNS can and wants to prevent such a movement to materialize. We therefore plan to increase from the short -term franc which would lead the SNB to react. By 12 to 18 months the franc should drop by 5% against the euro and the rates should become negative despite new BNS interventions on the foreign exchange market.
Wouldn’t that be the best of worlds possible for BNS, that of low modest inflation and the possibility of reducing the size of its assessment?
Exactly. It is a world preferable to that of recent years in the eyes of the BNS. But the environment has changed. The euro has ceased to constantly decrease compared to the dollar. From the statistical angle, the euro is more sensitive to the fluctuations of the dollar than the Swiss franc. In the long term, the drop in the dollar can help the euro to appreciate itself against the Swiss franc.
In your last note, why are you talking about the end of the refuge value of the franc?
The franc will lose part of its refuge value due to the deflation which threatens the Swiss economy. Without this factor, the BNS would have no reason to lower its rates below 0%, given the distortions caused by negative rates. The latter, for example, encourage the private sector to take excessive risks in a context of high debts of private households.
Switzerland will have no choice but to fight any increase in the short -term franc. But in the longer term, economic forces and the foreign exchange market lead us to believe that the SNB will not have to intervene very long.
What type of deflation threatening Switzerland? Do you expect a drop in prices and wages?
In the short term, deflation will be limited. But a very indebted economy is more sensitive and vulnerable. The risk becomes higher as soon as the employment indicators deteriorate. The increase in wages will be largely forced. A subsequent deterioration must be avoided.
In terms of purchasing power parity, the franc is overvalued 25% against the euro according to your study. Is it high historically?
Yes, indeed. For this reason, we fear that the risk of deflation is increasing in the short term. But Switzerland does not risk a crisis. She does not encounter structural problems. By still lowering interest rates, the SNB can prevent deflation from becoming severe and the real estate market, lowering, deteriorates the record of households.
What do you expect from American customs duties on Switzerland?
Switzerland is in a difficult position compared to the United States because the latter modify their way of carrying out their trade war. The emphasis is placed on what is called section 232 which results in an assessment by product category. The major risk for Switzerland comes from the fact that the category in which the United States has the largest trade deficit is the Pharma. In addition, it is very popular in the United States to advance a political agenda that reduces health costs. As Switzerland first exports pharmas products, the risk is obvious. The problem will not be major for the country, given the structural assets of Switzerland. Uncertainty remains high on this subject. We do not expect results before July due to the worsening of the conflict in the Middle East.
What will be the impact of bilateral III on Switzerland?
We expect a positive impact for Switzerland from a medium and long -term perspective. It is one of the reasons why we do not expect a major problem for Switzerland. In the short term, we are more concerned with the shock on the pharmaceutical industry.
If inflation was to start up the United States and elsewhere, especially due to American prices and migration policy, what would be the impact on the American and Swiss rate curves?
The impact of an increase in inflation would be more pronounced in the United States than in Europe. Inflation will increase in the United States while Switzerland is threatened with a risk of deflation. So the price difference will increase. The American rate curve will increase, which can create bullish tensions on the Swiss curve, but much less.
It should also be understood that this American inflation results in a drop in the dollar, which will further limit the impact on the Swiss curve. However, we observe a significant slowdown in the American labor market, signs of weak consumption and a certain vulnerability of real estate. All this suggests that at 6 to 12 months, the inflation trend will be more down. Finally, we believe that the increase in prices creates an increase in inflation, but it works as a tax increase such as that of VAT. The effect is only temporary.
