Swiss Franc Cap May Remain at 1.20 as SNB Resists Exporter Calls

Swiss Franc Cap May Remain at 1.20
The franc, seen as a haven in times of turmoil, gained as much as 37 percent against the euro in the year before the SNB imposed the limit on Sept. 6, as European leaders failed to contain the debt crisis. Photographer: Chris Ratcliffe/Bloomberg

Dec. 14 (Bloomberg) -- The Swiss central bank may resist pressure from exporters to further curb the strength of the franc as officials avoid testing the credibility of their currency policy and take time to assess deflation risks.

The Swiss National Bank, led by Philipp Hildebrand, will keep the franc’s minimum exchange rate at 1.20 per euro, according to 9 out of 13 economists in a Bloomberg News survey. The Zurich-based central bank will also maintain its benchmark interest rate at zero, when policy makers announce their decision at 9:30 a.m. tomorrow, a separate survey shows.

SNB policy makers are weighing the risks of defending a higher floor at a time of a worsening European fiscal crisis against the threat of deflation as the economy cools. While Hildebrand has said the central bank is ready to take further measures if needed, increasing the limit would be “risky at this juncture,” said Geoffrey Kendrick, head of European currency strategy at Nomura International Plc in London.

“Current policy is credible, effective and profitable,” Kendrick said. “Moving the floor when euro-zone concerns are high risks tempting market attack. If markets broke a 1.25 floor, they would be more inclined to attack the 1.20 level.”

Declining Prices

The franc, seen as a haven in times of turmoil, gained as much as 37 percent against the euro in the year before the SNB imposed the limit on Sept. 6, as European leaders failed to contain the debt crisis. It reached a record 1.0075 per euro on Aug. 9 and has traded in a range of 1.20 to 1.25 since policy makers imposed the cap.

The SNB had a record loss of $21 billion in 2010 after it purchased foreign currencies at an unprecedented pace in the 15 months through June to stem franc gains.

SNB board member Jean-Pierre Danthine said on Nov. 4 that even at the current level, the franc “remains high” and should continue to weaken over time. “If the economic outlook and deflationary risks so require, further measures will be taken,” he said without elaborating.

Swiss consumer prices fell 0.5 percent in November from a year earlier, the biggest drop in more than two years, after declining 0.1 percent the previous month.

“One swallow does not make a summer and two months of falling prices doesn’t mean we are in deflationary territory,” said You-Na Park, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “Admittedly, there is a risk of deflation, but the SNB will bide its time and wait and see whether further data confirm the downward trend in consumer prices.”

‘Monetary Easing’

Switzerland’s economy is showing increasing signs of a slowdown, adding pressure on companies to lower costs. The KOF economic leading indicator fell in November to the lowest in more than two years and manufacturing output contracted for a third month. Novartis AG, Europe’s second-largest pharmaceutical company, has said it plans to trim 2,000 jobs.

Reto Huenerwadel, an economist at UBS AG in Zurich, said the SNB may cut its growth and inflation forecasts at tomorrow’s meeting. In September, policy makers projected the economy will expand between 1.5 percent and 2 percent this year. Consumer prices may drop 0.3 percent in 2012, they said.

“We expect the SNB to engage in a further monetary easing by lifting the lower boundary” to 1.25, Huenerwadel wrote in an e-mailed note. “Across the various peer groups in Switzerland - - employers and employees -- we think the support for further monetary activities is a given.”

Franc ‘Burden’

Holcim Ltd., the world’s second-biggest cement maker, said last month franc gains reduced third-quarter earnings. Swatch Group AG Chief Executive Officer Nick Hayek has called the franc “difficult” and the Swiss Employers’ Association said on Nov. 7 the currency is still overvalued.

“For many companies, the exchange rate of 1.20 francs per euro isn’t sufficient to ease the burden,” Hans Hess, head of Swissmem, the nation’s largest lobby group for manufacturers, said last month, when calling for a higher franc limit.

Economists expect the Swiss exchange rate to remain steady. The currency will trade at 1.23 per euro in the first quarter of 2012, according to a Bloomberg survey of 36 economists. In the fourth quarter of next year, it may average 1.26 per euro, it showed.

“In the course of 2012, we expect the franc to weaken against the euro as the debt crisis may ease,” Alessandro Bee, an economist at Bank Sarasin in Zurich, wrote in a research note. “On this background, the floor will not be a major issue anymore as it loses its importance as a crucial backstop against the franc’s strength.”

‘Wait and See’

Even with the SNB raising the floor, companies may see waning sales growth as the euro-region economy edges closer to a recession. The European Central Bank last week lowered borrowing costs for a second time in as many months and forecast the 17-member area to expand just 0.3 percent in 2012 instead of a previously projected 1.3 percent.

Interest rate futures show the SNB may keep borrowing costs on hold into 2014.

“The economy is lackluster, the price level may ease in the near term, and there’s no inflation in sight for a long, long time,” said Ralf Wiedenmann, chief economist at Vontobel Asset Management Ltd. in Zurich. “For now, the best for the SNB is to wait and see.”

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To contact the editor responsible for this story: Craig Stirling at