UBS AG, Switzerland’s biggest bank, increased its forecasts for the franc against the euro as the Swiss currency’s world-beating gains in the past six months confound those expecting it to weaken.
UBS predicts the franc will trade little changed at 1.22 in a month. That compares with its previous estimate of 1.25, strategists including Gareth Berry and Geoffrey Yu wrote in a note published today. The new three-month forecast is 1.24, from 1.27 previously. The Swiss National Bank last week lowered its inflation target and pledged to defend its franc cap of 1.20 per euro set in September 2011.
Analysts have cut their forecasts for a drop in the Swiss currency through June to the least in nine months. That’s a concern for Swiss policy makers, who introduced the cap to prevent exports from becoming uncompetitive. SNB Alternate Board Member Thomas Moser said today the central bank was ready to enforce the cap using its currency reserves, and was prepared to take further steps if needed.
“Last week the SNB was very conservative, this means they view the situation with a great deal of caution,” London-based Yu said today in a telephone interview. “Sending this message shows the SNB expects the price pressures to be on the downside. We don’t see any big short-term moves” in the euro-franc exchange rate, he said.
The franc weakened 0.1 percent to 1.2191 per euro as of 4:42 p.m. London time. It strengthened against all of its 16 major peers in the past six months through the end of last week.
The franc will trade at 1.23 per euro at the end of June, according to the median estimate of more than 50 analysts in a Bloomberg News survey. That’s the strongest forecast since the data was first collected in June 2013.
The International Monetary Fund today recommended the SNB maintain its cap of 1.20 per euro and said the central bank may introduce negative rates on reserves of commercial banks if the franc strengthens further.
The franc was overvalued by 12 percent last month, compared with 11.1 percent in January, according to a gauge of its effective strength in real terms versus the currencies of 40 trading partners published in the central bank’s monthly statistical bulletin.
The SNB predicts annual consumer prices will stagnate this year, before climbing 0.4 percent in 2015, it said last week. It has earlier predicted 0.2 percent for 2014 and 0.6 percent for next year.