Switzerland is running out of ammunition to fight the global currency wars.
In the three months since the Swiss National Bank scrapped the franc’s ceiling against the euro, it’s intervened in currency markets, cut interest rates and on Wednesday made more depositors subject to its negative rates. Yet the franc has still gained the most among its Group-of-10 peers this year, with traders positioned for further strength. On Thursday, it advanced against every other major currency.
Ditching the cap has left the nation at the mercy of the European Central Bank’s unprecedented stimulus program, which is driving investment into franc assets. Those gains are starting to hurt, with consumer prices tumbling and Swiss stocks lagging behind their European counterparts.
“If the market wants to enforce a stronger franc, the SNB cannot do anything against it,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. He expects the franc to climb to parity with the single currency later this year, from 1.0324 per euro on Thursday and 1.2 at the start of the year.
Switzerland is limited in what it can do to keep these gains under control. Its deposit rate of minus 0.75 percent is already lower than the ECB’s minus 0.2 percent -- and cash is still pouring across the border. Greece’s struggle to secure bailout funding and stay in the euro zone is boosting the franc’s allure as a relatively secure investment.
“The franc offers one of the few safe havens,” said Sebastien Galy, a New-York based currency strategist at Societe Generale SA. Switzerland’s trade balance means it’s not reliant on foreign investment to fund its budget.
While the SNB did succeed in weakening the franc on Wednesday by expanding the number of accounts its negative deposit rate applies to, that dip will be short-lived, according to Geoffrey Yu, a senior currency strategist at UBS Group AG. Less than a day after the announcement, the franc was back up to where it was before the move.
It’s a “very marginal easing step” whose “net effect is limited,” said Yu, who’s based in London. UBS is Switzerland’s biggest bank.
The SNB also reduced the deposit rate on Jan. 15, the same day it stopped defending the franc’s upper limit of 1.20 to the euro. The cut was intended to mitigate the effects of scrapping the ceiling.
Switzerland’s currency still went on to strengthen beyond a level of one franc per euro that day for the first time. It’s since relinquished some of its gains, though it remains about 15 percent stronger than before the cap was abandoned.
“Negative rates are ultimately an emergency tool which need to be used aggressively and then pared,” Galy said.
Options prices suggest traders expect further gains. They’re paying about 2 percentage points more for three-month contracts to buy the franc versus the euro over those to sell, the second-biggest premium in the G-10 along with that for the dollar, data compiled by Bloomberg show.
The franc is also the best performer in a basket of G-10 peers tracked by Bloomberg Correlation-Weighted Indexes, climbing 9.5 percent in 2015.
SNB spokeswoman Silvia Oppliger declined to comment on the central bank’s policy and referred to comments made by Chairman Thomas Jordan on March 19. Speaking to Bloomberg Television, Jordan said the franc was overvalued and pledged to keep rates at a record low and to intervene in markets where necessary.
Eventually, Switzerland can expect to get relief when Europe’s economy improves as a result of the ECB’s 1.1 trillion-euro ($1.2 trillion) QE plan, sending the single currency higher, said Lisa Scott-Smith, a money manager at Millennium Global Investments Ltd. in London.
“The recovery in the euro area is having an impact,” said Scott-Smith, whose company oversees $13.4 billion. “That said, Greece’s situation hasn’t gone away and that’s weighing on the euro.”
Any turnaround in the franc is unlikely to come soon enough to cure Switzerland’s falling prices. The SNB expects consumer prices to drop 1.1 percent this year and only start rising again in 2017. Inflation in the euro area will climb 0.1 percent this year, according to economists surveyed by Bloomberg.
The SNB may also refrain from cutting rates too much because that would damage the financial-services industry, which accounts for 10 percent of Switzerland’s $670 billion economy, said Peter Rosenstreich of Swissquote Bank SA.
“The SNB wouldn’t want to be in a position where its policy hurts its own banks while it did little to stop foreign money seeking safety,” said Rosenstreich, Swissquote’s chief markets strategist in the town of Gland. “The Swiss franc is seen as a safe-haven still.”