SNB sidelined
As was widely expected, the Swiss National Bank held its policy unchanged. Incoming macroeconomic data has been mixed and political risk from Europe has failed to materialise, providing no impetus for the SNB to shift policy strategy.
On the economic front, despite recent improvement in inflation data, the SNB downgraded its 2018-2019 inflation forecast. The distant downgrade gave the meeting a slightly dovish tint from its prior, more cautiously optimistic, outlook.
The bank also reiterated its commitment to negative interest rates and FX intervention. With the domestic economy growing below trend and only surveys providing evidence of potential pick up, the SNB is correct in keeping policy untouched. With outlook for domestic data subdued, CHF will remain at the mercy of European events while less sensitive to shifts in global yields.
The pace of the ECB normalisations and European political uncertainty will continue to drive CHF through EURCHF direction. With European peripheral yields tightening, indicating less political concerns (French elections, Italy general election and Greek debt funding issues), CHF should weaken against the Euro. EURCHF base at 1.0860 should support a recovery bounce back to 1.1000 resistance.
BoJ maintains status quo and still focuses on 10-year yield
BoJ had no choice than to hold its monetary policy unchanged for now. The base rate has been kept on hold at -0.1% and the central bank will continue to focus on maintaining the 10-year yield to 0 by purchasing massive amounts of Government bonds (80 trillion yen annually).
The BoJ seems definitely stuck in its very loose monetary policy as deflationary pressures are still important.
Some recent fundamental data showed improvement in Japan’s economy. Japan’s demand has accelerated according to a report released last Wednesday and central bankers, once more, expect this demand to keep growing, in particular the foreign demand. Nonetheless the inflation is standing well below the target, and this has not changed for the past decade. CPI is currently standing at an annualised data of -0.4%.
Upside pressures on the currency remain but the BoJ cannot tighten its monetary policy or it would largely hurt its economy. The safe haven status is also one key issue, as whatever the state of Japan’s economy, investors would drive their money as soon as a risk-off sentiment arises.
We believe that Japan, in the medium-term, will try to expand the monetary policy divergence with the US in order to help reduce pressures on its currency. Yet, we consider that the US economy is overestimated and may trigger again inflow towards the Japanese yen. We reload bullish yen positions around 112 against the greenback.
