EUR/CHF Approaching 1.20; Swiss National Bank To Intervene - page 2
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SNB Threatening Negative Rate Awaits Draghi’s Next Move
Swiss National Bank officials have their eyes on one man: Mario Draghi.
The prospect of the European Central Bank intensifying stimulus by purchasing government bonds has weakened the euro, pushing the franc to within 0.2 percent of the SNB’s upper limit of 1.20 versus the single currency. More than 60 percent of economists in a Bloomberg News survey say SNB President Thomas Jordan will have to use negative interest rates to buttress the ceiling if ECB quantitative easing threatens the threshold.
Policy makers at the Swiss central bank have pledged numerous times to “immediately” supplement their three-year-old cap if needed, with options including a charge on sight deposits. While no change is forecast at their policy meeting in Bern this week, their willingness to follow through may be tested early in 2015.
“The SNB are in a trade-off here,” said Jordan Rochester, an economist at Nomura International Plc in London. It’s “between a proactive decision of cutting rates before ECB action, or kicking the can further down the road and saving ammunition in case they need to relieve pressure on the floor if the ECB does commence quantitative easing.”
ECB Stimulus
Last week, ECB President Draghi postponed another barrage of stimulus until at least January, saying he’ll “reassess” the situation then. Further policy easing in the euro area could cause a depreciation of the common currency against the franc.
The euro has already fallen about 2 percent against the Swiss currency this year. The franc was partly boosted in the buildup to a referendum last month on the SNB’s gold holdings. If it had passed, it would have forced the central bank to boost gold reserves, impeding its ability to intervene in foreign-exchange markets.
The franc traded little changed against the euro at 1.2021 at 8:52 a.m. in Zurich. Against the dollar it stood at 97.48 centimes.
All but one of the 27 economists surveyed forecast the SNB will step up interventions should pressure on the cap intensify, according to the poll conducted Dec. 4-8. Seventeen see it introducing a negative deposit rate, following the ECB’s June move to charge banks for overnight deposits. With permanent excess liquidity in the Swiss financial system exceeding 300 billion francs ($307 billion), negative rates would have a bigger impact in Switzerland than they did in the euro area, according to SNB Board Member Fritz Zurbruegg.
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Swiss Franc Weakens as SNB Introduces Negative Rates; Euro Drops
Switzerland’s franc weakened the most in nine months versus the euro after the nation’s central bank introduced negative interest rates to help defend the currency’s cap.
The euro declined for a second day against the dollar as the Swiss National Bank decision boosted speculation the European Central Bank will expand stimulus measures next year. A gauge of the dollar reached a five-year high amid signals the Federal Reserve will raise interest rates next year after yesterday’s policy decision. Australia’s dollar rallied from a four-year low as rising Asian stocks spurred demand for higher-yielding assets.
“The SNB action highlights the policy divergence occurring across the world,” said Alvin T. Tan, a foreign-exchange strategist at Societe Generale SA in London. “What the SNB action did today, and why it helped undermine the euro, is that it adds to the expectation the ECB will be stepping up asset purchases next year.”
The franc depreciated 0.2 percent to 1.20381 per euro as of 10:13 a.m. London time after dropping as much as 0.7 percent to 1.20974, the weakest level since Oct. 10.
The dollar was little changed at 118.56 yen after surging 1.9 percent yesterday, the biggest advance since Oct. 31. The U.S. currency strengthened 0.2 percent to $1.2323 per euro, and earlier touched $1.2278, the strongest level since Dec. 8. The yen gained 0.2 percent to 146.09 per euro.
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Swiss National Bank scraps euro cap
The Swiss National Bank unexpectedly scrapped its cap on the franc on Thursday, sending the safe-haven currency crashing through the 1.20 per euro limit it set more than three years ago.
Minutes after the announcement the franc had soared by almost 30 percent in value against the euro. SNB vice-chairman Jean-Pierre Danthine had said as recently as Monday that the cap would remain the cornerstone of its monetary policy.
"This is a very risky move. You can see that in the market reaction that is extreme," Sarasin economist Alessandro Bee said.
In its second surprise announcement in as many months, the SNB said it would discontinue the cap it introduced on Sept. 6, 2011 to fight recession and deflation threats after investors fleeing the euro zone crisis pushed the franc to record highs.
"This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate," the SNB said in a one-page statement.
Last month, it was forced to take further measures to defend the cap as investors concerned about the euro zone and Russia's deepening crisis bought the currency, saying it would charge banks for deposits in francs for the first time since the 1970s.
On Thursday, SNB said it would further lower the interest rate on these sight deposit account balances -- cash commercial banks and other financial institutions hold with the central bank -- by 0.5 percentage points, to −0.75 percent, above a certain threshold.
It said it would also expand its three-month Libor target range to -1.25 percent and -0.25 percent from the previous range of -0.75 percent to 0.25 percent.
"We believe that latest day's FX interventions should have cost plenty to the SNB and pushed the SNB toward today's surprise decision," said Swissquote analyst Ipek Ozkardeskaya.
"Given the pressures on the EUR/CHF, an accidental break of the floor would have been more serious for SNB credibility. The panic situation in the franc is expected to continue until (a) new game plan (is announced)."
In a chaotic few minutes on markets after the SNB's announcement, the franc broke past parity against the euro to trade at 0.8052 francs per euro before trimming those gains to stand at 1.04 to the euro at around 1050 GMT.
"The explanation that the overvaluation has decreased has been wiped out within seconds," said Sarasin's Bee. "Let's hope that this is an extreme move that will normalize soon. It is certainly dangerous for the Swiss economy."
The SMI index of Swiss shares fell by 6.1 percent, its biggest one-day fall since October 2008.
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EUR/CHF weekly outlook: January 19 - 23
The euro regained some ground against the Swiss franc on Friday after posting its largest ever one day decline against the franc in the previous session and hit fresh 12-year lows against the dollar amid prospects for monetary easing by the European Central Bank as early as this week.
The euro posted its largest ever single-day decline against the Swiss franc on Thursday after the Swiss National Bank abandoned its 1.20 per euro exchange rate cap that it imposed in September 2011.
SNB Chairman Thomas Jordan said Thursday the cap had “protected the Swiss economy from serious harm” but added that maintaining the policy was not “sustainable or sensible in the long term.”
“The euro has depreciated considerably against the U.S. dollar and this, in turn, has caused the Swiss franc to weaken against the U.S. dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified,” the central bank said.
The central bank also cut interest rates deeper into negative territory, a move intended to dissuade investors from buying the franc.
The diverging monetary policy stance between the Federal Reserve, which is poised to raise interest rates and central banks in Europe and Japan, has seen the dollar strengthen broadly in recent months.
The surprise move indicated that the SNB is anticipating that the ECB will implement quantitative easing measures at its upcoming meeting on Thursday, in an attempt to spur inflation and growth in the euro area.
An interim ruling last Wednesday, which is likely to be accepted by the European Court of Justice, said the ECB was free to pursue a bond purchasing program without legal challenge.
EUR/CHF was trading at 0.9930 late Friday, up 1.75% for the day after falling to all-time lows of 0.8696 on Thursday. The pair still ended the week with losses of more than 17%.
USD/CHF was up 2.25% to 0.8586 late Friday, having recovered from the lows of 0.7360 struck in the previous session. The franc still ended the week with gains of 15% against the dollar.
EUR/USD was down 0.55% at 1.1567 in late trade on Friday, after falling to lows of 1.1461 earlier in the day, the weakest since November 2003.
In the week ahead, investors will be focusing on Thursday’s outcome of the ECB’s policy meeting and the banks post policy meeting press conference will be closely watched.
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