Away from the wild speculation surrounding the US Federal
Reserve’s meeting this evening and away from the strides being made in the
eurozone, the Swiss National Bank gave its quarterly monetary policy assessment
this morning. As expected, the SNB kept interest rates on hold in the 0-0.25%
band. Slightly more interesting than this, however, was the SNB’s decision to reiterate its commitment to defending the EUR/CHF floor (or ceiling if you prefer to look at
it that way) of 1.20.
Since the escalation of the eurozone debt crisis, the
safe-haven franc attracted huge investment and the excessive appreciation that
this caused was damaging to the Switzerland’s economy. In August 2011, the
Swiss National Bank responded by intervening in the currency markets to weaken
the franc (put simply, buying lots of euros and selling lots of francs). In
September 2011, the SNB set a floor for the EUR/CHF exchange rate, pledging to
use all the resources at its disposal not to allow the franc to strengthen past
this point (below a rate of 1.20).
Since September 2011 then, any dip below the 1.20 threshold has
been fleeting and marginal, but the market has certainly tested the SNB’s
resolve. Central banks currency intervention is historically very unsuccessful and expensive, just ask the Bank of Japan. Up until now though, the SNB is doing a remarkably good job but only time will tell.
Swiss National Bank's statement this morning has told us that they
expect the Swiss economy to grow by 1.0% this year, down from the 1.5% growth
they expected three months ago (though this is still a decent pace of growth).
In addition, the SNB also sees consumer prices falling by 0.6%, more than initially
expected, with inflation expectations for 2013 and 2104 also downgraded.
In light of downgraded growth and inflation expectations, the SNB was quite clear on its on-going commitment to
maintain the EUR/CHF floor this morning, stating that “If necessary, it stands
ready to take any further measures at any time.” It’s not surprising either,
the swiss franc remains overvalued. With near-term risks to Swiss growth high
given the poor growth outlook for the eurozone economy, the SNB is likely to maintain
its defensive stance in the medium term. However, talk of shifting the floor
even higher up to 1.25 looks unlikely to be realised, as the SNB will probably
view this as too risky.
Richard Driver
Currency Analyst
Caxton FX
