SNB To Reiterate Unlimited Intervention To Prevent Excessive CHF Appreciation

The SNB meeting on Thursday will likely be reiteration on what was said on September 6, when the central bank drew a line in sand to curb Swiss franc's appreciation. We are, however, interested to see how the SNB would update the inflation forecasts. We expect to see downward revisions from 3 months ago given the recent global economic turmoil and strength in CHF.

Last week, the SNB announced in a surprising manner that it had set the minimum target of EUR/CHF at 1.20. It would 'enforce this minimum rate with the utmost determination' and is 'prepared to purchase foreign exchange in unlimited quantities'. FX market reaction indicated the announcement was credible as the franc immediately plunged to 1.20 against euro and has been staying there since then. We believe SNB's intervention will persist for some time, rather than being a one-off action, as the central bank stated that the franc remained too high even at the target level. It would take further measures if the 'economic outlook and deflationary risks demand it'.

Swiss GDP grew +0.4% q/q in 2Q11, easing from +0.6% in the prior quarter. Exports contracted +1.3% q/q after expanding +3.4% in the first quarter, signaling currency appreciation has begun to bite. Economic growth is expected to slow further in the second half of the year due to strong CHF (despite recent interventions, the franc remained 20% against the dollar and +10% against the euro when compared with a year ago) and weakness in Switzerland's major trading partners. Other economic indicators also pointed to a more fragile outlook. KOF leading indicator fell to a 2-year low of 1.61 in August from 1.98 in the prior month while the SVME-PMI index slipped to 51.7 in August from 53.5 in July. Both indicators signaled further moderation in economic growth in coming months.

Intervention may lead to inflationary problem in the medium term. However, this should not be a concern for policymakers as price levels are significantly below the central bank's target. We expect the SNB to revise lower the trajectory of its inflation forecasts in September as economic outlook weakened both domestically and globally. Further ease in inflationary pressure should be consistent with the SNB's monetary decision to leave the 3-month Libor target range at 0-0.25%.