Swiss National Bank holds firm on EUR/CHF floor

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

Swiss National Bank Gets Aggressive

The SNB announced this morning that it intends to keep the EUR/CHF rate at a minimum of 1.20 - this is the 'floor' which it will be defending. This direct intervention in the currency market caused the swiss franc to understandably sell off sharply across the board in response.

With the SNB recently warning the Swiss public that they would have to endure a strong swiss franc for the foreseeable future, there has been some market scepticism towards the SNB’s genuine commitment/ability to limit the currency’s strength. The SNB’s announcement this morning referred to “utmost determination” to containing further CHF appreciation, and it has had the desired effect; the 1.20 target was achieved in a matter of minutes.

Central bank currency intervention has failed repeatedly; we have seen it in both the yen and the swiss franc. It can slow the pace of appreciation, but it does not reverse the trend. Could this time be different? The SNB definitely looks serious this time, claiming willingness to buy “unlimited quantities of foreign currency.” Whether it is successful or not, it is likely to cost the SNB hugely.

The EUR/CHF target rate of 1.20 will almost certainly be tested by speculators and ongoing safe-haven flows alike. Concerns surrounding global growth and eurozone debt are not going anywhere, so demand for safer assets like the swissie will persist. Nonetheless, in the short-term, you can expect the SNB to stick to their task. There could be some further major moves in the offing as well, as other central banks respond.

Knee-jerk moves saw the EUR/CHF gain by 8.5% and the GBP/CHF by almost 8.0%; these are major moves. The effects have been felt throughout the currency markets though; GBP/EUR has declined fairly sharply as investors get out of the swissie and into the single currency.

Richard Driver
Analyst – Caxton FX
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And its the Swiss Franc coming up on the outside...

Whilst Japan continues to dominate the headlines we have seen the yen and dollar strengthen as the markets chase the solace of safe-haven currencies. However, there is one very well-performing currency that may have crept under your radar- the Swiss franc, A.K.A the Swissie. Due to Switzerland’s economic, political and fiscal stability, the franc represents the third major safe-haven currency. Indeed the swissie has today climbed to its highest point against the US dollar in at least 40 years and is rallying against all its major counterparts, which illustrates its increasing popularity in these times of extreme market uncertainty.
However, just as the Japanese government is determined not to let the yen appreciate too strongly, the Swiss National Bank (SNB) has showed willingness to intervene. The bank intervened last year when it considered the swissie to be overvalued, and it could do the same again if the soaring currency threatens the country’s economic growth, having stated last December that it would “take measures necessary to ensure price stability.”

The Swiss government are concerned about maintaining the strength of its export sector, but a closer look reveals that despite currency appreciation, its trade surplus actually widened last month. In addition, last year’s intervention was broadly unsuccessful (as intervening often is) and cost the SNB $25bn. In light of this, and amid a healthy economy, it seems unlikely that the SNB will act any time soon, though one has to wonder how far they will allow their currency to appreciate. This will surely come to the point if Swiss growth were to slow down and safe-haven appeal remain strong.

Against sterling, the swiss franc has gained 5% over the last month with the rate currently at 1.47. But there is certainly room for further gains with the rate still some way from the 1.44 levels seen at the end of 2010.

In other news, investors looking for higher yields might, ironically, look to Quantitative Easing, racing at Cheltenham Festival on Thursday, people say he has a licence to print money...

Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.