Analysis – Swiss franc rises to six-year high as central bank stands back

FILE PHOTO: A sign painted on the Swiss National Bank (SNB) in Bern
FILE PHOTO: A plaque is painted on the Swiss National Bank (SNB) in Bern, Switzerland, October 11, 2021. REUTERS/Denis Balibouse

November 29, 2021

By John Revilli

ZURICH (Reuters) – The Swiss National Bank is no longer holding back the franc’s appreciation, according to data released on Monday, in an eye-catching change as the safe-haven currency rallied to highs. against the euro in more than six years.

The central bank’s clear stance will confuse investors accustomed to the SNB’s mantra that it will fight closely with negative interest rates and buy foreign currency to rein in the Swissie.

On Monday, the franc rose to 1.0426 against the euro – its highest level since July 2015 – boosted by the emergence of a new COVID-19 variant, low Swiss inflation and weakening of the euro.

The disparity is not far from the 1:1 to euro exchange rate achieved by the franc shortly after the SNB’s last policy change in January 2015.

But the latest visual deposit data – which represents the SNB’s interventions – raised only 94 million francs last week, a fraction of the foreign exchange purchases seen last year.

J.Safra Sarasin economist Karsten Junius said: “A rise below 100 million francs shows that the SNB chose not to defend the 1.05 level.

This development could mean that the SNB has given up on limiting the franc at its current level, given Switzerland’s steady inflation and the country’s strong economy.

Instead, the central bank may be hoarding its firepower to prevent rapid and large-scale price increases, economists said.

There was no immediate response from the SNB to Reuters’ request for comment on Monday’s data and economists’ reaction to it.

Thomas Stucki, chief investment officer at St Galler Kantonalbank and former manager of the SNB’s Foreign Exchange Reserve.


“They will prevent a move below 1.04 to 1.03,” he added. “Then they will step up their interventions.”

Stucki added that the franc has finally reached 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 to be reached next year, but we think it will in the next two to three years.”

Over the weekend, board member Andrea Maechler said the SNB is monitoring the franc level, although the central bank is not targeting a specific rate, she said.

Swiss inflation at 1.2% falls within the SNB’s definition of price stability and reduced need for action.

“The long-term policy of the SNB remains in place: against overvaluation of the Swiss franc. However, the question is what does overvaluation mean,” said UBS economist Alessandro Bee.

Because inflation in the Eurozone is much stronger than in Switzerland, the fair value of the franc has increased to 1.11 against the euro from 1.20 last year, he said.

“From this angle at 1.05, the franc is no longer overvalued,” said Bee. “This ensures a lower intervention threshold for the SNB, even at this point it is unclear exactly where this new threshold is.”

The stance 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 getting more complicated for the SNB now,” said ING economist Charlotte de Montpellier. “There is a risk of a new flight to safety and the consolidation of currencies seen as safe havens, and therefore the Swiss franc.”

So far, the SNB has done the right thing by not wasting too much money defending the franc, said J Safra Sarasin economist Junius.

“I think they will try to prevent any appreciation at 1.03. That will be the last line of defense before peering,” he said.

(Reporting by John Revill, Editing by William Maclean) Analysis – Swiss franc rises to six-year high as central bank stands back

Bobby Allyn

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