Here’s an interesting view on the consequences of the SNB’s move from Societe Generale’s Sebastien Galy.
First of all, as others have noted too, Galy believes the decision to defend a 1.20 level floor against the euro is credible this time, since the environment is very different. Not only is there a political will to intervene, measures like CPI — which are dropping — justify an expansion of the monetary base.
As Galy notes:
The SNB moved to set a floor at 1.20 in the EUR/CHF. Front end vols in EUR/CHF have started to collapse and should continue to do so especially downside vols. In 2006/2007 when EUR/CHF was trading in a range, vols were far lower than now . This intervention move is distinct from 2010 when the SNB was reacting to deleveraging of peripherals and was eventually forced to surrender and suffer from a public backlash. Now, it already has the political support to move ahead as well as a clear economic imperative so that the SNB’s move is credible. The CPI yoy inflation dropped more than expected. This is even as the well publicized price cuts by retailers such as Migros, Coop and Manor are yet to show up in the data.
Though there’s another potential side-effect — one that’s likely to make Swiss real estate a major beneficiary, notes Galy:
The presumption is that the intervention will be largely unsterilized leading to an expansion of moneys in Switzerland and extremely low mortgages. It also means that real estate in Switzerland is going to be the new gold. There is still an open window before the government starts to close it by regulating the mortgage market, presumably by increasing the risk weight on Swiss mortgage holdings. The extremely well informed article from a Basel newspaper two weeks ago had mentioned that regulation of the mortgage market was being considered by the government in addition to measures to help the Swiss export and tourism industry.
Meanwhile, from a bond perspective:
The net amount of investment flow into Switzerland is initially unclear as from a fixed income perspective, it is attractive for a Swiss Fixed Income investor to sell the 1M bond at home and invest in German or French Bunds to gain roughly 1%. In the future, every new wave of risk aversion is likely to translate into more negative rates in Switzerland. The issue will then be whether the SNB penalizes Swiss bank s who arbitrage these rates via deposits at the SNB. Presumably, it is in their interest of having negative rates to encourage investments outside of Switzerland.
Which means you can expect the Swiss shopping spree to take place both domestically and abroad.