Swiss Franc Strength Revives Talk of SNB Intervention

Thomas Jordan
President of the Swiss National Bank Thomas Jordan has repeatedly said he will exclude no measures to shield the cap, with the introduction of negative interest rates a "possible option." Photographer: Philipp Schmidli/Bloomberg

Pressure is rising on the Swiss franc.

With the franc near its strongest level against the euro in almost 21 months, the Swiss National Bank may intervene for the first time in two years to defend its cap of 1.20 versus the shared currency, according to economists from ING Bank NV to Julius Baer Group Ltd.

Demand for the franc increased after European Central Bank President Mario Draghi stepped up his rhetoric this month on policies needed to combat weak inflation, edging the ECB closer to quantitative easing. The conflicts between Ukraine and Russia, as well as in the Middle East, have also increased appetite for the Swiss currency, which investors favor during times of crisis.

“Tensions have re-appeared and they must be more on alert than nine or twelve months ago,” said Julien Manceaux, an economist with ING in Brussels. “If things were to deteriorate further, other types of unconventional policies may be taken” by the SNB, he said.

The SNB says it last intervened in September 2012 to defend the ceiling. President Thomas Jordan has repeatedly said he will exclude no measures to shield the cap, with the introduction of negative interest rates a “possible option.”

“This QE discussion has been explosive,” said Beat Siegenthaler, a currency strategist at UBS in Zurich. “After a period where people were getting a bit bored with Swiss FX and rates, it’s getting very interesting again.”

Tied to Euro

The franc has appreciated 0.9 percent against the euro this month and reached 1.2052 today, its strongest level since December 2012. It was at 1.2059 as of 8:05 a.m. in New York.

“The SNB has tied its fate to the euro,” said Janwillem Acket, chief economist at Julius Baer in Zurich. “If the franc moves closer to the 1.20, I could imagine they’d intervene further.”

The SNB set the cap in September 2011 after investors anxious about the euro-area debt crisis pushed the franc nearly to parity with the single currency. Now, the euro is weakening because of the ECB’s loose policy, designed to improve the region’s bleak prospects for growth and inflation, said Alessandro Bee, an economist with Bank J Safra Sarasin AG in Zurich.

“The situation isn’t comparable to 2012,” he said. “If there is QE, the Swiss won’t be so much in the center of it all -- investors will be able to look for assets like the dollar and the pound that offer safety and yields.”

Against the dollar, the franc fell to 91.85 centimes yesterday, its weakest level since November 2013.

Not Pre-Emptive

At Citigroup Inc., Valentin Marinov says the SNB may eventually introduce negative rates to defend the cap. Still, fast action is unlikely, he said.

“The timing of the measures remains uncertain,” the head of European Group-of-10 currency strategy at Citigroup said in a note to investors. “The SNB may not announce any new measures pre-emptively.”

According to Bloomberg News’s monthly survey of economists, published before Draghi made his comments in Jackson Hole, Wyoming, on Aug. 22, the SNB was seen maintaining its cap for at least another two years.

“How big the effect of QE on the exchange rate would be is hard to say -- because details of the program -- should one get enacted -- aren’t known yet,” said Esther Reichelt, currency strategist at Commerzbank AG in Frankfurt. “But there certainly will be some, not least because QE will change people’s inflation expectations.”

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