As we had expected the SNB held policy rate at -0.75% and reiterated wiliness to intervene in FX markets for benefit of the overvalued franc. While SNB President Jordan has emphasized the importance of the interest rate differential for FX pricing the lack of aggressive ECB action means little spill into EURCHF. Policy rate differential has narrowed to 25bp which is manageable and not historically significant. Expectations for the ECB to reduce the deposit rate again in March 2020, the SNB is keeping their powder dry. Secondly, the SNB stressed the deterioration in the global economic backdrop and revised down Swiss growth forecast (“between 0.5% and 1% for 2019 as a whole, compared to around 1.5% in June”) for the coming quarters but seem to understand lower negative rates would not help growth. The inflation forecast was lowered again, partly due to strong CHF, to 0.4% from 0.6% for 2019. Too the relief of many banks the exemption threshold calculation for negative rates would be reviewed. The SNB stated, “exemption threshold will now be updated monthly and thereby reflect developments in banks’ balance sheets over time”. The more equitable division of negative rate burden will help banks deal with a challenging interest rate environment. The new exemption threshold calculation will kick-off 1st November 2019.

Overall, the SNB decided to “play it safe” keeping what limited firepower they have left on the side. With an bloated balance sheet and deep negative rates the SNB needs to be tactical in policy action. The SNB is clearly not the biggest, so needs to be smarter. The SNB might be hoping that President Draghi view of maxing out policy easing, means a switch to fiscal policy, which will have a lower direct effect on (and yield differentials) foreign exchange pricing. The lack of motivation by the SNB to cut rates or significantly challenge FX market directing, combined with uncertainty around US-China, Saudi-Iran and weak economic backdrop suggest further build-up in shorts EURCHF.

BoJ statement unchanged as economy stable

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It seems that market participants have been left unimpressed by the statement of the Bank of Japan, pushing the demand for JPY higher. Without much surprise, the BoJ has kept its short- and long-term interest rates at 0.10% and around 0% respectively while confirming current JGB purchases of JPY 80 trillion and JPY 6 trillion in Japanese shares per year. The odds of seeing the BoJ expanding stimulus beyond next policy meeting in 31 October will strongly depend on economic conditions, as it keeps status quo on “maintaining interest rates at low levels at least through spring 2020”. While confirming that it is paying closer attention to the possibility of losing momentum toward achieving its 2% inflation target, the BoJ appears willing to change course of its forward guidance if necessary – a move that could potentially depend on the outcome of negotiations with the US. Furthermore, the release of trade data, although slightly better than previously expected, are likely a sign that a worsening of trade conditions might be a catalyst for the BoJ to act in accordance.

As both US President Donald Trump and PM Shinzo Abe are expected to meet on 25 September at the UN General Assembly in New York, Japan Foreign Minister Toshimitsu Motegi is pressing the US to confirm that no national security tariffs of 25% will be imposed on Japanese vehicles and auto parts. In counterpart, Japan would agree to reduce tariffs on US agricultural products, including beef imports, in line with the multilateral Trans-Pacific Partnership terms of 26.60% from actual 38.50%. Yet the imposition of quotas for US beef estimated at 240000 tones for 2019 and higher looking forward, although comprising most of US beef imports, might stay a major impediment in the negotiations. In addition, the declaration made by Japanese Economy Minister Yasutoshi Nishimura that the government is willing to support SMEs and agricultural businesses depending on the outcome of current trade talks and agreement signed does not appear convincing. Without mentioning upcoming consumption tax hike to 10% (+2% increase) starting from October, it seems that the BoJ is expected to face further pressures looking forward, albeit further easing would likely worsen the Japanese financial systems whose margins are eroding. Considering the release of August exports and imports data at -8.20% (prior: -1.60%) and -12% (prior:-1.20%), the BoJ silence is most likely to stop at its next monetary policy meeting in October as inflation data published on Friday is likely to disappoint while an escalation of downside risks to the economy would lead to further easing.

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