Goldman Sachs economist Dirk Schumacher says that the SNB may go to negative rates if the ECB cuts rates in April as any pressure from an ECB cut will put pressure on the Swiss franc. He says there’s a “reasonable likelihood” that the ECB will cut in April on a further decline in inflation and/or further EUR appreciation.
At the moment the race on rates (which is what the EUR/CHF trade is largely being driven by) is finely balanced. Last week Swiss yearly CPI slipped back into negative territory just as it looked like it might start to gain a foothold above zero. EZ inflation is still very weak but at the moment it’s holding around 0.8%, so we’re unlikely to see another cut unless it slides to around 0.5% or less.
If inflation starts to creep up in the EZ then the threat of cuts will come out and so should lend support to EUR/CHF, particularly if Swiss CPI stays negative. If both countries inflation starts ticking up in any meaningful way then again the race to raise rates will be the driver. For the bulls we want the ECB to be raising ahead of the Swiss. Conversely further falls in inflation and we’ll want to see the SNB acting ahead of the ECB.
My view is that it will take a big drop in EZ inflation to get them to cut rates so the pressure is on the SNB to act to curb them slipping into deeper deflation. Aside from that we’re currently trading Chinese and Ukraine worries so the economic fundamentals are mostly out the window