One year on from the introduction of the floor in EURCHF, the odds may be beginning to turn in the Swiss National Bank’s (SNB) favour, with speculation emerging that the central bank could lift the minimum price level.
It is 12 months since the SNB introduced its SFr1.20 floor in EURCHF, pledging to sell francs in unlimited amounts in order to protect its economy from the strength in its currency. Since then, there have been periods – towards the end of last year – when speculation mounted that the SNB would raise the floor. Equally there have been periods – from April this year – when speculation has mounted that the central bank would be forced to abandon its policy.
Certainly as the eurozone debt crisis entered a new and more dangerous phase after Greece’s general election in April, investors have been eager to pour money into the perceived haven of Switzerland. Indeed, the SNB’s FX reserves have surged higherand now stand at an eye-watering 70% of GDP.
That in turn has left the SNB not only with the problem of how to manage its reserves, but also how to contend with increased franc liquidity on the domestic economy, and on the property market in particular.
As Simon Smith, chief economist at FxPro, points out, it is ironic that in avoiding the property-related excesses of other countries and the sovereign problems of much of the eurozone, the SNB is now facing the risk of a bubble in its property sector as a by-product of defending the franc.
Still, the SNB remains committed to the floor in EURCHF, with SNB chairman Thomas Jordan reiterating this week that a stronger franc would be a substantial threat to the Swiss economy and pledging to enforce the minimum exchange rate with the “utmost determination”.
Is SFr1.22 on the cards?
Indeed, it would appear that the tide, for the first time in a while, is turning in the SNB’s favour.
Not only has EURCHF pulled away from SFr1.20 – all be it to the not so giddy heights around SFr1.2040 – but rumblings of further action from the SNB to tame the franc are starting to emerge. There was even speculation on Wednesday that the central bank would mark the floor’s anniversary by raising it to SFr1.22.
The talk comes as Swiss consumer price data on Wednesday confirmed the deflationary environment in the country, while Swiss GDP and activity figures also disappointed this week.
Jane Foley, senior currency strategist at Rabobank, says against that backdrop, there is not much reason the SNB cannot continue to threaten to print francs to protect the EURCHF peg.
“In view of this week’s poor [economic data] releases there is all the more reason why the SNB will resolve to keep fighting safe haven inflows and, assuming that the SNB remains profitable, we would rate the chances of a move in the peg to SFr1.25 as being greater than the probability that the SNB will abandon the peg,” she says.
Also supporting the SNB’s efforts are hopes that Mario Draghi, European Central Bank president, will outline plans to stabilize the eurozone government debt market at the central bank’s policy meeting on Thursday.
Obviously, if Draghi comes good with his promise to do “whatever it takes” to ensure the survival of the euro, then upward pressure on the franc will ease.
Still, the bar is set high. As the chart below shows, the franc benefitted directly from concerns about a break-up of the euro. EURCHF mirrored movements in peripheral eurozone yield spreads over bunds – a proxy for a euro break-up – until the SNB introduced the floor.
| EURCHF and peripheral yields |
| Source: DataStream, OECD, Lloyds Bank |
The fate of the franc would seem to be in the hands of eurozone policymakers, and just how effective they are in compressing intra-eurozone yield spreads.
As Adrian Schmidt, FX strategist at Lloyds, says: “There may not be much enthusiasm to buy EURCHF until spreads move back below the levels where the SNB imposed the floor, but if the EU and the ECB manage to reduce market fears of euro break up there is potential for a substantial decline in spreads.”