The surprise move of the Swiss National Bank to remove the cap on the CHF/EUR trade is a signal that the European Central Bank’s (ECB) quantitative easing (QE) is imminent, according to analysts at Morgan Stanley.
Potential further weakness of EUR
Morgan Stanley analysts Graham Seckel and Krupa Patel also suggested the possibility that the euro will experience further weakness. According to the analysts “such weakness would have put further upward pressure on the balance sheet of Swiss National Bank.
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Seckel and Krupa noted that Swiss National Bank’s currency intervention resulted to the significant growth of its balance sheet in recent years. According to them, the size of the central bank is becoming more of a political issue in Switzerland.
The analysts estimated that the balance sheet of Swiss National Bank is approximately 85% of the country’s GDP.
Morgan Stanley’s foreign exchange strategist, Hans Redeker believed that the decision of the Swiss National Bank to remove the CHF/EUR cap partly reflected the central banks’ reduced need to acquire euro denominated assets.
CHF revaluation is negative for Swiss equities
According to Seckel and Krupa, the Swiss National Bank does not want a too strong revaluation of the CHF therefore it might instead increase intervention on the US dollar trade. The analysts noted that Morgan Stanley’s foreign strategy team is targeting a move to 1.05 for both USD/CHF from 0.82.
The analysts emphasized that the revaluation of the CHF is negative for the Swiss stock market citing the reason that will likely put downward presses on the economic growth (bad for tourism and exports).
The revaluation will also increase deflationary pressures and negative affect corporate profits.
Seckel and Krupa explained, “When the peg was put in place in 2011, Switzerland’s relative 12m EPS had fallen by around a third over the prior 12m. The peg then marked the through in this trend and Switzerland’s relative EPS outperformed the market by 25% since then.”
The analysts added that the MSCI Switzerland outperformed MSCI Europe by 30% over the same period. Swiss stock were also at a 35-year high.
Reason why Swiss earnings are sensitive to CHF
Seckel and Krupa explained that Swiss earnings are sensitive to the CHF because the companies in Switzerland are “very international in their focus.” They estimated that 85% of the sales of Swiss companies are generated overseas. Many of the Swiss large-cap entities obtained 90% to 95% of their revenues abroad.
The analysts noted that international investor’ perceived that the stronger CHF offsets the actual price declines for Swiss stocks in the very short-term, therefore the stock prices are up today in USD and EUR terms.
Seckel and Krupa believed that the situation is temporary. According to them, “the medium-term drag on EPS from a stronger CHF will ultimately undermine relative performance going forward.