Safe-haven bids briefly returned to the CHF due to localised EM turmoil yesterday, while overall EUR/CHF was still able to hold up near 0.96. That is the highest level since last June going into today’s SNB meeting, while in contrast, USD/CHF has fallen to three-month lows.
In the grand scheme of things, such FX developments are unlikely to shift the needle much when the SNB decides on interest rates today, while domestic money markets price in roughly 2-in-3 chances of a 25bp cut today.
There has indeed been a bit of a pricing out since the announcement of massive fiscal spending from the EU, as it remains to be seen how the SNB will factor that in its inflation profile. On that matter, Swiss CPI cooled further over the past few months to just about staying positive, largely matching the bank's forecasts.
Nevertheless, as this downtrend is yet to come to a halt, it could prove quite difficult for the SNB to justify not cutting rates further today, unless inflation is expected to settle much higher than the 0.5% previously anticipated. Ultimately, the CHF faces some knee-jerk reaction to the rate decision on the day, albeit with no long-term ramifications though. In our view, the rate differential should already be compelling enough to make the CHF a favoured funding currency once global uncertainties eventually abate.
The Riksbank is poised to keep its policy rate on hold at 2.25% today, the first pause since last June and one that could last for the foreseeable future. That was already the bank’s central case in December, while market participants have only rallied behind such prospects more recently, thanks in part to the stronger rebound in Swedish inflation in the past few months. That, coupled with the expected fiscal spending boost in the EU, have raised the question about the eventuality that the Riksbank could add some rate hikes to an otherwise flat rate profile for the years ahead. We are fairly cautious because
This may in turn take some modest shine off this year's G10 FX outperformer, while the SEK could in the end be more at risk of any eventual question on why the Riksbank decided to take big SEK selling flows (linked to EU budget payment) off- market, or what lies next for the FX reserves hedging programme.
Australia’s labour market data surprised significantly to the downside. Employment dropped -52.8k jobs with most of the decline occurring in full-time work. Despite the fall in employment, the unemployment rate was steady at 4.1% due to large fall in labour force participation from a record 67.2% to a 9M low of 66.8%. If the participation rate had not fallen, the unemployment rate would have jumped to 4.3%. The sudden fall in labour force participation has us viewing today’s data warily. The ABS puts the fall in labour force participants down to fewer over-54- year-old workers returning to work in February, reversing a post-pandemic trend. Indeed, a lower level of labour supply is evident in the fall in the underemployment rate from 6.0% to 5.9%, a 16.5-year low. This will hardly alleviate wages growth.
The Australian rates market is now fully priced for another RBA rate cut by July with a strong chance of a post-election rate cut in May. We think this pricing is a bit aggressive given February represents the first fall in employment in nearly a year and it was driven by people quitting looking for work rather than weak labour market demand. We acknowledge this quitting could be viewed negatively and as the “discouraged worker” effect. But this phenomenon usually occurs when there is a lack of demand for workers. The still-elevated level of job vacancies suggests this is not the case.
