FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that according to the Bank of England’s measure, the Swiss effective exchange rate has this week reached its weakest level since the SNB walked away from its EUR/CHF1.20 floor on 15 January 2015.
Key Quotes
“Over the past 12 months the generally stronger tone of the USD has allowed USD/CHF to recover ground. As a result USD/CHF has reclaimed almost all of last January’s fall. While this will have been welcomed by the SNB, the EUR/CHF is more important for Swiss exporters and thus carries a larger weight in the country’s effective exchange rate.
Although EUR/CHF reached a 12 mth high around 1.1076 this week, this is clearly well below the old EUR/CHF1.20 floor. If the ECB manages to instigate a broad based drop in the value of the EUR through further monetary policy stimulus in the coming months, it is likely that the SNB will likely have to step up the ante to prevent EUR/CHF from falling. The fact that EUR/CHF has already rallied this week suggests that the SNB may already have stepped up FX interventions in a pre-emptive move.
The SNB, DNB and Riksbank and to some extent the BoE have little option but to follow the movements of the ECB closely. A broad-based weakening in the value of the EUR would imply a tightening of monetary conditions in the Eurozone’s trading partners via the exchange rate. All of these central banks are saddled with extremely low inflation levels suggesting that none would welcome a strengthening in their respect exchange rates.
SNB have continued to warn that it will keep using intervention “under certain conditions”. FX intervention combined with negative interest rates are the SNB’s two pillars of defence against a rise in demand for the CHF.
Although it can be argued that the SNB has limited policy tools available to it, the reluctance of the EUR to give up ground since the summer, despite the ongoing use of QE by the ECB, has given the SNB some breathing space. Very low ECB interest rates have turned the EUR into a funding currency. This factor combined with the Eurozone’s large current account surplus has meant that the EUR now displays safe haven characteristics. This pattern of behaviour, if sustained, will make it much easier for the SNB to fight unwanted CHF inflows.
That said, with little room for complacency a cut in the ECB’s discount rate in March will increase the risk that the SNB will also feel the need to announce additional easing at its next policy meeting on March 17. In view of the EUR’s safe haven behaviours we have raised our forecasts for EUR/CHF modestly. We expect EUR/CHF to remain pivoted around the 1.09/10 area in on a 3 mth view.”
(Market News Provided by FXstreet)