SNB re-affirms commitment to SFr1.20 floor; move to SFr1.25 likely in June
The Swiss National Bank (SNB) pledged to enforce the 1.20 floor in EURCHF with the utmost determination after its first meeting since the resignation of former chairman Philipp Hildebrand.
Hildebrand, who was forced to quit after details of his wife’s FX dealings surfaced, was the architect of the SNB’s currency policy. However, the central bank has been doing its utmost to convey to the market that nothing has changed as far as currency policy is concerned now that Thomas Jordan has taken the helm.
Indeed, the SNB said it was prepared to buy foreign currency in “unlimited quantities” to defend the peg and that it would continue to maintain liquidity on the money market at an exceptionally high level.
“Even at the current rate, the Swiss franc is still high,” the central bank says. “In the foreseeable future, there is no risk of inflation in Switzerland.”
It added if developments in the international economy are worse than foreseen, or if the Swiss franc does not weaken further, as expected, downside risks for price stability could re-emerge.
“The SNB stands ready to take further measures at any time if the economic outlook and the risk of deflation so require,” the central bank says.
The reaction in the spot market saw the CHF trade higher, reflecting some disappointment that the central bank did not raise the floor in EURCHF.
In the options market, vols collapsed, with 1-week EURCHF dropping from 7 to 3.5 and 1-month falling 4.5 to 3.75.
However, at SFr1.2105, EURCHF still remains well above the EURCHF1.2050 level at which it has been stuck during the past few weeks.
Realistically, the SNB had little reason to raise the floor at this juncture, but a move up to SFr1.25 at its June meeting looks likely.
That would give the bank more time to rebuild its credibility after the Hildebrand debacle. It has already moved to introduce new guidelines on personal dealing by board members and published a report giving a clean bill of health to members’ personal transactions.
That should pave the way for acting chairman Jordan to be installed on a permanent basis in the next few weeks.
Away from the central bank politics, it would also give more time for the current optimism on global markets to consolidate.
In particular, while worries over eurozone government debt have eased since the European Central Bank’s long-term refinancing operation and news of a second bail-out for Greece, concerns still linger.
Waiting until June would give the SNB more breathing space to assess whether another spate of anxiety over the eurozone is going to ramp up demand for its currency and test the credibility of its currency policy.
The SNB left the door open for a move in the summer, not only by suggesting the CHF was still strong but also by lowering its inflation forecasts from an annual rate of -0.3% to -0.6%.
It should pay to position for a higher EURCHF.