On December 13th, 2012, the Swiss National Bank (SNB) holds its quarterly monetary policy assessment meeting. As we explained in the "drivers of Swiss inflation" post, inflation pressures will remain subdued for the next 2-3 years, because the effects of the quick rise of the franc and of the weak global growth need to be washed out.
With the recent Bundesbank expectations that growth in Germany will slow in 2013 and the expected weaker inflation in the eurozone, the SNB might even downgrade its inflation expectations for 2014, from values close to 1% down to 0.2%. These new estimations have already been announced by the Swiss statistics bureau.
(click to enlarge)SNB Inflation Forecasts September 2012 (source)
Given that there are many upwards drivers of inflation, like immigration, huge money supply and rising housing prices, we think the central bank will not hike the floor. On the contrary, the SNB recently emphasized more and more the risks in their balance sheet: assets like German government bonds do not yield enough to cover potential FX losses.
Recently, Credit Suisse and UBS announced negative interest rates for clearing clients that have high balances in francs. As has happened regularly before SNB meetings, FX traders go long EUR/CHF in the hope of a SNB move. The NZZ, a major Swiss paper, took these two pieces of news as the basis for speculating about a floor hike.
Most analysts expect stronger growth in Switzerland than in the euro zone in the coming years.
The Swiss economy has stabilized thanks to the introduction of the floor that helped to weaken the franc. Data from UBS and other sources showed that thanks to deflation and cheaper production prices, in purchasing power terms and for the real effective exchange rate, the franc is not overvalued any more.
We exclude an early end to the euro crisis. We reckon that Span, Portugal and Cyprus will go forward with austerity and the - weaker GDP growth - more debt - official sector haircuts - cycle, similar to Greece, but more slowly. In some years' time, Switzerland might see higher inflation than the periphery, countries where lower labour costs will reduce inflation.
At that time, the SNB will allow EUR/CHF to move under 1.20. Hence we recommend long-term investors hold Swiss francs in the form of ETFs (FXF) with an entry above EUR/CHF 1.21 or long-term Swiss government bonds with maturities over 20 years (e.g., CH0127181169, CH0127181193). Additionally we prefer the EWL ETF with 45% holdings in the major companies Nestle (OTCPK:NSRGY), Roche Holdings AG (OTCQX:RHHBY) and Novartis (NVS) or direct holdings in these stocks.