SNB decides against currency peg; ramps up money market measures to curb CHF rally
After speculation that the Swiss National Bank would impose a currency peg linked to the euro, the SNB decided Wednesday to hold off from intervening directly in the FX markets, preferring to extend measures already in place to curb further strengthening of the Swiss franc.
The bank will continue to expand liquidity in the Swiss franc money market by expanding banks’ sight deposits at the SNB from CHF120 billion to CHF200 billion. They also stated they would maintain their repurchases of SNB bills and execution of foreign exchange swaps.
The market impact was immediate. EURCHF fell 2.12% after the SNB announcement, trading at low of 1.1221 after opening in London at 1.1500, although the market steadied and rallied back above 1.1400 in the London afternoon. Currency option markets were muted after reaching record highs last week as speculation intensified that the SNB would impose a peg. There was a significant sell off yesterday, traders say. One-month implied volatility was trading at 21%, down from 26% last week. One-year implied vols were trading at 14.75% from 15.5% yesterday, after reaching historic highs of 19.75% last week.
“Yesterday vols were selling off hard; then there was a late panic as people started to think about a peg 5% to 10% higher. Now they are selling off aggressively again,” one head option trader at a European bank tells EuromoneyFXNews. “SNB has disappointed with their announcement, but spot is now behaving relatively well.”
The subdued options market activity is probably due to expectations that the Swiss federal council will support additional measures to quell the excessive strength of the franc, says Citi currency strategist, Valentin Marinov. That “could limit the downside in EURCHF and USDCHF as they will underscore the resolve of the SNB,” he says.
In a statement this morning the SNB announced that its attempts to curb the strength of the Swiss franc have had an impact, but it still considers the currency to be overvalued. The SNB reiterated that it would, if necessary, take further measures against a strengthening of the Swiss franc.
Yet Citi argues that, in practice, the central bank will be slow to engage in currency intervention. “We think today’s decision is an important indication that the SNB is still largely reluctant to intervene in the FX spot market,” writes Marinov. Any attempts to keep the CHF below a certain target ceiling will be “a measure of last resort for the SNB,” he adds.
Analysts agree that the SNB will continue to build a wall of liquidity supply to dull demand for the franc. Adding penalty rates to the already implemented FX forwards market intervention seems the next course of action.