Swiss inflation is still hovering close to zero, and even though EURCHF FX is now at 1.16, bringing YTD CHF depreciation to around 7.5%, domestic macro is highly unlikely to warrant a regime change in SNB monetary policy, added with the fact that the SNB is still applying sensitive language with the Franc.
The SNB only expects inflation to recover to above 1.1% by 2019, and is conditional with CHF LIBOR remaining at -0.75% (current) throughout the timeframe, and only to reach 2.0% by 2020. Broad growth is likely to trough around current levels slightly above 0% from where we are now with industrial production data rebounding, and leading indicators such as expected capacity utilization back at 2014 highs of 20% and money growth continuing to trend upwards. We did have a few false starts from 2015 in the Swiss economy so I would not be too quick to assume “this is the big regime change and Switzerland makes it to 2% growth”.
Survey expectations for inflation for the next 3-5 years remain at 1.05% (this is not yet close to the 1.65% figure we saw in 2013), and the current pickup of core CPI at 0.5%, is still minute to warrant any policy changes (even when adjusting that Switzerland experiences lower inflation to other developed economies). Inflation tends to underperform to year-end in Switzerland, which a slight, additional side-reason why I am not too overly excited with inflation back positive again year-to-date.
A good way to express a ‘cap’ in near-term growth expectations is via a CHF 6m6m / 1y1y flattener, which as a trade also looks quite good to balance a rates book that may-be net short. The curve is at 17 bp and around here to 20 bp seems like a good level to fade any near-dated risk premium. The trade rolls +8 bp over the course of 6m, which always helps.
The only downside to the structure is that it does retain some beta to the same curve points to the EUR but even so I think the 1y1y point is quite safe to not warrant too much back-leg steepening pressure in the EUR which may spillover to the CHF. Perhaps a cleaner way to trade it to remove the beta on the swaps curve to the EUR, would be via STIRs, looking at the z8/z9 spread where it’s currently at 25 bps, to play a flattener there to 20, or long the M8 contract outright around 100.60 to the 100.8 levels (around where CHF libor settles).