Since trading at close to parity with the euro on August 10, the Swiss franc has lost 18% of its value after the central bank ramped up their efforts to flood the money markets with liquidity. That looked to be going into reverse on Wednesday, after EURCHF slumped from a London open 1.1770 to 1.1660 after hitting stop losses at 1.1700 mid-morning. It reached at least a six week high of 1.1813 yesterday, according Deutsche Bank prices.
For three of the past four weeks, the SNB has made a policy announcement on Wednesdays at approximately 07:00 GMT, notes UBS’s FX strategy team. However, this failed to materialise last week and today. UBS also notes that sight deposits are now very close to (or at) the SNB’s target of CHF200 billion. The SNB expanded sight deposits more than six-fold, repurchased SNB bills and increased the execution of foreign exchange swaps in August.
According to Audrey Childe-Freeman, an FX strategist at JPMorgan Asset Management, if the central bank is to maintain its renewed credibility, it should continue to capitalize on the momentum it gathered in August and impose more measures.
“If the market is going your way, it is much easier to intervene. It is much more difficult to have a strong impact if the market is going against you. The SNB knows this,” Childe-Freeman tells EuromoneyFXNews. “We believe the SNB should capitalize on the recent correction and announce further measures soon.”
Still, such a move is not without risks. Liquidity expansion on top of the recent 150% surge seen in money-market liquidity could spur inflation and compromise its price stability mandate. However it isn’t clear that recent inaction suggests that the SNB is concerned about compromising that mandate in its efforts to achieve exchange rate stability.
Pressure on the CHF is unlikely to recede. With global markets still facing uncertainty, demand for Swiss financial assets remains strong. Yesterday, yields on short-term Swiss government debt turned negative, meaning investors paid more for the assets than they would get back when the securities mature. The three-month bills were sold at a price of 100.19, and will be redeemed at 100, translating into a negative yield of 0.75%
Timing and credibility will be essential to the SNB’s success, but measures such as direct intervention, a EUR/CHF peg and further liquidity expansion, may carry higher potential costs than the SNB is willing to bear.