FXStreet (Barcelona) – Ulrich Leuchtmann of Commerzbank, notes that the with SNB intervention threats still effective, and doubts on sustainability of its existing policy, risks for the next slide of EUR/CHF is looming.
Key Quotes
“It seems that even after having been floated by the Swiss National Bank (SNB), the exchange rate is still not really “free”. The reason for this is probably found in the SNB’s communications. Though SNB officials have scarcely made serious threats of further rate cuts recently (which we think would not be effective), they do not tire of threatening intervention. And remarks by SNB President Thomas Jordan suggest that the SNB has, in fact, intervened continuously in recent months. In April, EUR-CHF obviously traded so far above the exchange rate that would be justified without SNB intervention that the EUR-supportive factors no longer had an effect.”
“Is the market’s fear of the SNB justified? Probably not. Let’s remember that when the SNB gave up its floor of 1.20 on 15 January, it justified this step by saying that it wanted to prevent its balance sheet from exploding. Swiss central bankers have never explained what risks they expect if the balance sheet total is too large. However, if this line of argument still applies – as we believe it does – the current intervention strategy would be just as unsustainable as defending the level of 1.20. After all, the balance sheet is still rising. While it is expanding less quickly than at end-2014/early 2015 or any other period where the ECB had to defend the level of 1.20 through interventions, this should be due above all to the fact that the currency market is impressed by the SNB’s threat at the moment. However, the balance sheet will certainly become an issue again someday. And then we are likely to see the pressure on the SNB increase again, implying that a similar situation as in mid-January would emerge. As a consequence, EUR-CHF would go on a downhill slide whose timing is virtually impossible to forecast. But some day this slide will materialise once the currency market comes to realise that the SNB is unable to keep up its resistance on a permanent basis.”
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