SNB's Move: More about Equity than Policy

The Swiss National Bank announced today that as of May 1 the negative rate charged for sight deposits will be applicable to most institutions that were previously exempt. Many saw this as an easing move by the SNB and sold the Swiss franc in response.

The euro posted its biggest increase against the Swiss franc in a couple of months. It remains, however, well below the bottom of the CHF1.05-CHF1.10 that some suggest was a new albeit unofficial range (whatever that means).  The US dollar had been finding support near CHF0.9500 and the price action reinforces this as an important support area (that might extend to CHF0.9480). It is toying with the 20-day moving average near CHF0.9645.  The downtrend line drawn off the mid-March highs and April 13 high comes in just below CHF0.9800 now. 

It is important to understand what motivated the SNB.  It was not driven by monetary policy considerations.  It was driven by concerns about fairness.  For example, private sector pensions were subject to the negative deposit rate, but not government or SNB pension funds.  Some members of parliament objected to the lack of fairness. 

As of May 1, only sight deposits larger than CHF10 mln that will be exempt are from the central Federal Administration and a few other funds, such as for old age and survivors' insurance, disability insurance.   The percentage of sight deposits that are subject to the negative deposit rate may increase by about a third.

It is not clear how the newly non-exempt are going to response.  Some anticipate that to avoid the negative deposit rate, but also the negative bond market, where yields are negative through 10-years and the 15-year yield is below 10 bp.   They could do this be taking more risk, such as in boosting equity holdings or foreign assets. 

We don't read much policy implication into the SNB's move.  If problems in the euro area, or Russia for that matter, spur flows into Switzerland, the SNB has the wherewithal to lower rates further.  Recall that the 3-month LIBOR range is -25 to -125 bp and the target is in the middle. 

For so long so many assumed interest rates were bounded by zero.  The negative nominal rate regime is unprecedented.  We don't really know now where the lower bound truly can be found.  Officials have intimated there may be some more room, but limited.   On the other hand, an easing of the Greek crisis could go a long way to relieving some upward pressure on the franc.

Swiss rates remain well below German rates.  The Swiss 2-year note yields -92 bp compared with -26 bp in Germany.  The Swiss 10-year yield is -13 bp.  Germany's 10-year yield is 16 bp.  Switzerland 30-year bond yield is near 31 bp, while the comparable German yields is 57 bp. 

The Swiss franc is the only major currency that has appreciated against the dollar thus far this year.  The 2.8% gain against the dollar means that the investments in the Swiss equity market has done better on an unhedged basis, unlike the other major equity markets and most emerging equity markets. 
SNB's Move: More about Equity than Policy SNB's Move:  More about Equity than Policy Reviewed by Marc Chandler on April 22, 2015 Rating: 5
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