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Foreign Exchange

SNB’s rate intervention might fail to halt CHF climb

The Swiss National Bank’s attempt to stop the appreciation of the Swiss franc, in which it has reached record highs against the euro and dollar, might have limited success, according to FX strategists. Although the market response to the SNB’s announcement on Wednesday was encouraging, analysts doubt the long-term effectiveness of the policy.

“It still seems that the best the SNB could hope for is to stabilize EURCHF and USDCHF. It will be difficult to trigger an uptrend in the two crosses, given the lingering peripheral risks [in Europe] and the shaky investor risk appetite,” writes Valentin Marinov in a CitiFX market report today. According to a SNB statement that accompanied the rate decision, the central bank views the franc as “massively overvalued” and it plans further action to depreciate its currency within coming weeks. The announcement that the bank will target a three-month libor rate as close to zero as possible, at a range of 0-0.25% instead of the current range of 0-0.75%, caused the CHF to fall as much as 2.6% against the euro and 1.8% against the dollar on Wednesday.

Further policy action is likely to include adding more market liquidity and resuming the purchase of foreign-currency-denominated assets, Citi’s Marinov says, noting that the SNB has even previously resorted to negative interest rates on CHF deposits.

That will probably be in vain, according to Barclays analysts Paul Robinson and Sara Yates, writing in a research note today, who say that the SNB can change liquidity, but it cannot change the global economic and financial situation.

“The main driving force behind the CHF’s strength still seems to be in place,” they write. The European sovereign debt crisis is far from over, and the US still faces the probability of a ratings downgrade. The combination of the two is simply too much for the SNB to handle, the two conclude.

For now, the SNB plans to inject SFr50 billion ($64 billion) worth of liquidity into the Swiss money markets by expanding banks' sight deposits at the SNB from SFr30 billion to SFr80 billion. It will no longer renew repos or SNB bills and will repurchase outstanding treasury bills, effectively increasing both the Swiss monetary base and its holdings of government paper.

The flight to the Swiss franc is due its perceived safe-haven status, which has escalated with recent developments in both the euro-zone and the US. With Spain and Italy now under pressure, the possibility of significant economic weakness in the euro area is much more likely, causing masses of investors to flee from the euro. Similarly, the perceived economic and political weakness of the US is leading the dollar to depreciate significantly.

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