Speculation mounts for SNB to raise EURCHF floor to 1.25
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Foreign Exchange

Speculation mounts for SNB to raise EURCHF floor to 1.25

Speculation heightened on Friday that the Swiss National Bank was set to up the ante in its fight on deflation and raise the floor it imposed in the euro against the Swiss franc to CHF1.25.

 
Jean-Pierre Danthine, SNB

The talk was fanned after Jean-Pierre Danthine, SNB governing board member, said that policymakers remained ready to act if the economy deteriorated or if deflation threats emerged. “Even at a rate of CHF1.20 per euro, the franc remains high,” said Danthine. “It should continue to weaken over time. If the economic outlook and deflationary risks so require, further measures will be taken.”

Also adding fuel to the speculation were figures showing the SNB’s currency reserve s fell to CHF242.7bn at the end of October, down from CHF282.2bn in September and the first decline since July.

Analysts said the figures showed that the SNB was finding it relatively easy to enforce the CHF1.20 floorthat it imposed in EURCHF on September 6, when it warned over the “massive overvaluation” of its currency and the possible effects on its economy.

This, they said, might embolden the central bank to take on the market and lift the floor once again.

The Swiss franc fell to CHF1.2210 against the euro on Friday, with Citi reporting that flow in the euro against the franc was skewed 61% in favour of purchases of the single currency in the London trading session.

Some downplayed the speculation that the SNB was preparing to raise the floor, saying that the central bank was likely to wait to see the further developments in the Greek debt crisis before taking more action.

However, UBS said the SNB could well raise the floor if it saw an increased threat of deflation.

Beat Siegenthaler, FX strategist at the investment bank, said the downbeat economic outlook – issued by the European Central Bank after its policy meeting on Thursday – would increase the probability that the SNB would become more concerned in its December 15 quarterly economic assessment, since a recession in the eurozone would have a direct impact on the Swiss economy.

He said the publication of the monetary policy assessment would be crucial for the Swiss franc.

“If the inflation forecast moves noticeably lower from September, then this would indicate that the SNB will likely move the floor higher, probably to CHF1.25, and EURCHF would spike immediately,” says Siegenthaler.

“In contrast, if the inflation forecast remains unchanged or moves higher, then the CHF1.20 floor will be kept unchanged. In our view, the risk of intensifying deflation concerns is quite high and it makes sense for investors to position on the EURCHF upside, particularly as the downside risks look firmly capped at CHF1.20.”

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