SNB: Schlegel Highlights CHF Strength, Low SNB Equity in Zurich Speech
SNB President Schlegel highlights CHF appreciation, affirms the SNB's "flexible" inflation target, and is looking for a stronger SNB capitalization in today's speech in Zurich. Meanwhile, there appears to be little reference to either the recent downward inflation prints in Switzerland, or any more forceful commitment to larger rate cuts at the December meeting
- That is not necessarily unexpected - also former President Jordan refrained from giving a clear expectations steer ahead of meetings at least in recent times.
- Markets expectations for the December policy meeting have moved further dovish for multiple months now, currently standing at broadly around 42bps of expected easing. That would equalize to around a 2/3rds implied chance of an outsized 50bp cut in Dec.
Key highlights below:
- "In light of the balance sheet risks, the SNB's equity capital is currently considerably too low. Building up the SNB's capital must thus take precedence over profit distributions."
- "As an additional monetary policy measure, the SNB has also used foreign exchange interventions, both for countering the threat of deflation and for fighting inflation."
- "Given the strong influence of developments abroad on Swiss inflation, the SNB needs a monetary policy framework that allows for some flexibility in terms of accepted inflation rates."
- Find below slide 10 of Schlegel's presentation deck - which highlights CHF appreciation over time:
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GILTS: Widening To Bunds Extends
Gilts sell off again, seemingly as a function of the weakness in Tsys, given the lack of UK-specific news flow.
- Futures base at 98.22 for now, contract still some distance away from the Oct 10 low/bear trigger (95.83).
- Yields 2.5-4.0bp higher on the day, ~1bp off session highs, curve steeper.
- Benchmarks still within multi-week ranges.
- 10-Year spread to Bunds now 5.5bp wider on the day, back above 190bp, aided by the dovish ECB repricing.
US TSYS: Early SOFR/Treasury Option Roundup
Option desks reported better Tsy volumes vs. light mixed SOFR flow overnight, squaring of soon to expire Nov Tsy options adding to flow. Current projected cuts are largely steady to late Tuesday levels (*): Nov'24 cumulative -23.0bp (-22.0bp), Dec'24 -41.4bp (-40.5bp), Jan'25 -58.6bp (-58.1bp). Highlight trade includes:
- Treasury Options: Reminder, November options expire Friday
- +5,000 TYX4/wk1 TY 110.5 put spds 17, ref 111-02.5, midcurve over
- 18,800 Wednesday wkly 30Y 115.5/122.5 strangles ref 117-30 expire today
- 4,500 USZ4 116 puts, 120 ref 118-06 to -05
- 4,300 TYX4 109 puts ref 111-05.5
- +5,600 Wednesday wkly 10Y 111/111.5 strangles, 34 expire Oct 30
- -4,500 TYX4 111.5 calls vs. 2,250 TYX4 110.5/110.75 put strip, 8 net package ref 111-07/0.97%
- -2,500 TYF5 109/110 put spds 17 ref 111-11.5
- +5,000 USZ4 112/128 strangles 30 ref 118-08 to -07
- 1,500 USZ4 108/114 2x1 put spds ref 118-04
- SOFR Options:
- 2,5200 3QH5 97.25/97.50 call spds ref 96.38
- 1,500 SFRF5 95.62/95.75 put spds ref 95.96
- 2,000 SFRZ4 95.25/95.37/95.50/95.62 call condors ref 95.60
CHF: Danske Forecasting EURCHF at 0.91 on Rate Differentials & Fundamentals
Danske expect EURCHF to depreciate to 0.91 in the next twelve months on the back of "narrowing rate differentials and strong fundamentals". They think while negative SNB policy rates remain possible, domestic inflation "will remain sufficient" for a terminal rate of 0.5%, reached next March.
- We would highlight that CHF has relatively outperformed vs JPY during the recent leg higher in core yields, resulting in CHFJPY rising over 6.5% from the mid-September lows to the current 3-month high 176.35.
- However, it is also worth noting that the Citi CHF REER Index (CTTWBRCH Index) has moved around 80 pips lower in this period to 102.45, suggesting there is still room for CHF appreciation before the SNB might intervene again, bolstering Danske's call for a fundamentally stronger CHF via the PPP.
- EURCHF has been edging lower in recent sessions, narrowing the gap with initial support at 0.9307, the August 6 low. Accelerating downside momentum would then place attention on the Aug 05 low at 0.9211, the lowest level since the peg removal in 2015.
