global perspectives

    5 things to watch from the SNB

    5 things to watch from the SNB
    Philipp Burckhardt, CFA - Fixed Income Strategist and Portfolio Manager

    Philipp Burckhardt, CFA

    Fixed Income Strategist and Portfolio Manager

    After years of negative rates and currency interventions, Swiss monetary policy is on the cusp of change. As expectations build for the Swiss National Bank to begin tightening policy, what five things should investors be aware of? 

     

    1. Risk of a surprise. There is a risk of a somewhat stronger market reaction than usual to the Swiss National Bank’s (SNB) June meeting. Unlike the Federal Reserve and European Central Bank (ECB), which favour guiding market pricing and avoiding surprises, the SNB feels no urge to steer market expectations too precisely and, as a result, a rate hike of about 15bps is currently priced in. The SNB has meaningfully increased its level of communication recently – indicating change is ahead – but we expect it will generally continue to keep an element of surprise on its side.
       
    2. No hike just yet. We believe the SNB will refrain from raising interest rates at its June meeting and instead wait until September before embarking on a hiking cycle. When the bank does begin increasing rates, we think they will consider increments of 25bps or 50bps, if needed. Such moves would be in line with today’s ECB statement.
       
    3. Francs and balance sheets. Furthermore, the SNB is likely to switch gears in its communication and stop labelling the Swiss franc as being “highly valued”. This inevitably opens up discussion about when and how to reduce the central bank’s balance sheet, which we believe the SNB will address in the near future. There is no urgency, but the risks of running a large balance sheet are elevated while the benefits appear less obvious than in the past.
       
    4. Flexibility matters. The Swiss economy is resilient and can weather headwinds from nominal CHF appreciation and volatility, especially as the real effective exchange rate does not seem excessively overvalued, in our view. Additionally, a stronger franc could tame inflationary pressures, giving the SNB more flexibility in its interventions.
       
    5. Not the first mover. The main reason to wait in our opinion is that although inflationary pressures are building, the momentum is nonetheless slowing, large parts of the spike can be attributed to supply-side shocks and, most importantly, the long-term projection of inflation is still below the upper range of the SNB’s definition of price stability. Indeed, today the ECB communicated its intention to start hiking rates at its July meeting and proceed with a likely 50bp increase in September. We believe the SNB will take note of ECB policy, as it often does, but that it is in no hurry to act and prefers to preserve the interest-rate differential with the Eurozone by not moving first on rates.

    important information.

    For professional investor use only
    This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
    Lombard Odier Investment Managers (“LOIM”) is a trade name.
    This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
    Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
    Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
    Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
    Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
    No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited  which is authorized and regulated by the FCA. ©2022 Lombard Odier IM. All rights reserved.