FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that almost a year has passed since the SNB walked away from its commitment to maintain a minimum EUR/CHF1.20 exchange rate on January 15 2015.
Key Quotes
“Even though the USD trended higher vs. the CHF through most of last year, the enormity of the CHF’s rally last January means that measured on a 12 mth view, the CHF is still the best performing G10 currency.
In response to the strains placed on businesses from currency strength, the Swiss unemployment rate ticked higher during the course of last year to 3.4% from 3.2% at the end of 2014. While the size of this change may appear incremental, the direction is a cause for concern. The Swiss unemployment rate has continually pushed higher since 2011, in contrast with the direction of the jobless rate in Germany which has ticked lower in recent years to new post reunification lows of 6.3%.
At its policy meeting last month the SNB referred to demand for labour as “muted” and levels of capacity utilisation as “unsatisfactory”. That said, despite preliminary GDP data suggesting that the domestic economic stagnated in Q3, the SNB expects real GBP growth of 1% in 2015 accelerating to approximately 1.5% in 2016. Both of these predictions are above the Bloomberg consensus forecasts of 0.9% and 1.2% respectively.
The level of EUR/CHF is plainly overvalued and is set to remain a thorn in the side of Swiss business and the SNB potentially for some time yet. One source of comfort for Swiss policy setters has been the decision by the Federal Reserve to commence its tightening cycle. This has supported the USD. The resultant upward trend in the value of USD/CHF since mid-January last year has relieved some pressure on Switzerland’s effective exchange rate which on most measures has returned to 2011 levels (see chart).
While a broadly stronger USD will be supportive for Swiss exporters, the risk that the ECB could be successful in engineering a weaker EUR this year remains a risk. In order to contain this threat, as it stands SNB policy remains hugely accommodative with the target for the three month Libor remaining at between -1.25% and -0.25% and the interest rate on sight deposits with the SNB also standing deeply in negative territory at -0.75%. At the same time the SNB warned last month that it will remain active in the foreign exchange market “in order to influence the exchange rate situation, as necessary”.
While it can be inferred that already having deeply negative interest rates reduces the impact of further incremental movements in traditional monetary policy instruments and increases the likelihood that a monetary authority will attempt to manipulate its currency, the SNB makes no bones about the fact that it is actively involved in a currency war. Last month it stated that “the SNB’s willingness to intervene in the foreign exchange market are intended to ease pressure on the Swiss franc”.
Despite the ECB’s ongoing use of QE, the EUR has been reluctant to give up much ground over the past couple of months. We attribute this in part to the Eurozone’s large current account position which is affording the EUR protection against heightened levels of risk appetite. Weak Eurozone inflation, however, suggests there is a risk that the ECB could step up its dovish rhetoric this year. On such an occurrence the risk that the SNB will be actively involved in the FX market will rise. A more dovish ECB suggests there is risk of a move to EUR/CHF1.07 in 2016, though we expect that the 1.08 area will remain a pivot for EUR/CHF this year.”
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