By John Revell
ZURICH (Reuters) – The Swiss National Bank is no longer standing in the way of the franc’s appreciation, according to data published on Monday, in a striking change in light of the safe-haven currency’s rally to its highest levels against the euro in more than six years.
The central bank’s clear stance will confuse investors accustomed to the SNB spell that it will struggle aggressively with negative interest rates and FX purchases to rein in the SNB.
On Monday, the franc rose to 1.0426 against the euro – its highest level since July 2015 – supported by the emergence of a new variable for COVID-19, lower Swiss inflation and a weaker euro.
The level is not far from the 1:1 against the euro that the franc reached briefly after the SNB’s last policy change in January 2015.
But the latest demand deposit data – a proxy for the SNB’s interventions – increased by 94 million francs just last week, a fraction of the forex purchases seen last year.
Economists say one factor in the slight increase may be the withdrawal of cash by bank customers, which happens every year in the run-up to Christmas and reduces the amount of cash banks hold with the Swiss National Bank.
“However, the increase of less than 100 million francs shows that the SNB chose not to defend the 1.05 level,” said Karsten Junius, economist at J. Safra Sarasin.
The development could mean that the Swiss National Bank has abandoned restricting the franc at its current level, due to benign Swiss inflation and the country’s strong economy.
Instead, the central bank may stockpile its firepower to prevent a rapid and widespread rally instead, economists say.
The Swiss National Bank declined to comment on Monday’s data and the reaction of economists to it.
said Thomas Stocky, chief investment officer at St Galler Kantonalbank and former director of the SNB’s foreign exchange reserves.
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“They will prevent movement below 1.04 to 1.03,” he added. Then they will intensify the interventions.”
Stocky added that the franc is on its way to eventually parity.
“It is clear from the development of inflation in Europe and Switzerland that the franc will become more expensive over time,” he said. “We don’t expect parity next year, but we think it will happen in the next two or three years.”
Over the weekend, Governing Council member Andrea Mitchler said the Swiss National Bank was monitoring the level of the franc, although the central bank had not targeted a specific rate, she said.
Swiss inflation at 1.2% is considered within the SNB’s definition of price stability and reduces the need for action.
“The long-term policy of the Swiss National Bank remains: fight strong overvaluation of the Swiss franc. The question is, what does strong overvaluation mean,” said UBS economist Alessandro B.
Because of stronger inflation in the eurozone compared to Switzerland, the fair value of the franc rose to 1.11 per euro from 1.20 last year, he said.
“From this perspective, at 1.05 the franc is not holding strong anymore,” Bey said. “This requires a lower intervention threshold for the SNB, so at this point it is not clear where exactly this new threshold is.”
The position of the SNB will be tested in the coming days, especially if the omicron variant of the coronavirus increases demand for the franc.
“The situation is now more complex for the SNB,” said Charlotte de Montpellier, an economist at ING Bank. “There is a risk of a renewed flight to safety and a strengthening of safe-haven currencies, and therefore the Swiss franc.”
So far, the Swiss National Bank has done the right thing by not wasting too much money defending the franc, said Junius Economist J. Safra Sarasin.
“I think they will try to stop any rise at 1.03. This will be the last line of defense before parity,” he said.