Switzerland’s franc depreciated to the weakest level in more than a year versus the euro on speculation the European debt crisis that fueled demand for the currency is easing.
The franc fell for a second day after a government report showed consumer prices extended their longest slump in at least four decades. Italian and Spanish government bonds rose, adding support for the euro, which strengthened against all 16 of its major peers. The Swiss National Bank imposed a ceiling for the franc of 1.20 versus the euro in September 2011 to combat the threat of deflation.
“If traders needed any other reason to go long on the euro versus the franc, they got it today with the release of Swiss CPI,” Peter Rosenstreich, chief foreign-exchange strategist at Swissquote Bank SA in Geneva, wrote in a note to clients. A long position is a bet an asset will gain.
The franc declined 0.4 percent to 1.2177 per euro at 4:24 p.m. London time after depreciating to 1.2201, the weakest level since December 2011. The Swiss currency strengthened 0.2 percent to 91.23 centimes per dollar.
Volatility on Swiss government bonds was the highest among developed nations today, according to measures of 10-year or equivalent-maturity debt, the yield spread between two- and 10- year securities, and credit default swaps. Switzerland’s 10-year yields advanced four basis points, or 0.04 percentage point, to 0.66 percent, the highest since Sept. 17.
The euro headed for its biggest weekly advance versus the dollar since Sept. 14, after the European Central Bank President Mario Draghi said yesterday the economy should gradually recover. The 17-nation currency climbed as much as 0.7 percent today to $1.3366, the strongest since April 3, and was set for a 2.2 percent advance from Jan. 4.
Italian and Spanish securities rose after both nation’s borrowing costs dropped at auctions this week. The yield difference, or spread, between 10-year Italian bonds and similar-maturity German bunds narrowed as much as 12 basis points, or 0.12 percentage point, to 248 basis points, the least since July 22, 2011. The Spanish-German spread narrowed to as low as 324 basis points, the least since March 21.
Yesterday’s “upbeat comments by ECB President Draghi could provide the trigger” for a new trend of the euro rising versus the franc, UBS AG strategists Gareth Berry and Geoffrey Yu wrote in an e-mailed note, comparing the euro-franc exchange rate to a “coiled spring.”
“We have witnessed enormous Swiss franc inflows over our books ever since the inconclusive outcome of the May 2012 general election in Greece,” they wrote. “These inflows have yet to reverse. So euro-versus-franc will not be short of propellant whenever the move eventually gets underway.”
Swiss consumer prices dropped 0.4 percent in December from a year earlier after falling 0.4 percent in November, the Federal Statistics Office said in a statement today. That’s the 15th month of annual declines, the longest stretch since at least 1971. Prices fell 0.2 percent from the previous month. Economists forecast an annual drop of 0.3 percent, according to a Bloomberg News survey.
The statistics office said prices fell 0.7 percent last year, and it estimates inflation will be 0.2 percent in both 2013 and 2014.
While the Swiss currency has weakened since the ECB pledged in August to purchase government bonds of distressed nations to cap borrowing costs, the SNB has said the franc remains “high” and weighs on companies in Switzerland.
“The euro-franc minimum exchange rate of 1.20 has not staved off deflation threats and has fueled speculation that further SNB action can be expected,” Rosenstreich wrote in the note. “With the euro currently in high demand this would be a prime opening to act,” he said, adding this may be done by raising the cap or with negative interest rates.
The franc has slumped 0.8 percent this week versus the euro, the biggest drop since the period ended Nov. 11, 2011. It slid yesterday after Zuercher Kantonalbank said it reserved the right to set negative interest rates on franc deposits for its retail customers.
Switzerland’s currency has still strengthened 1.7 percent in the past month, according to Bloomberg Correlation-Weighted Indexes which track performance among 10 developed-nation currencies. The euro rose 2.2 percent in the same period and the dollar fell 0.8 percent, the indexes show.
The cost of Swiss imported consumer goods dropped 2 percent from a year ago and 1.2 percent from the previous month, today’s report showed. Prices of domestic goods increased 0.1 percent in the year and the month. Under a European Union harmonized method, consumer prices fell 0.3 percent from a year earlier.