Bold action from the European Central Bank on Thursday could trigger a domino effect of measures by other central banks that have been fighting against the strength of their respective currencies against the euro, analysts say.
While the Swiss National Bank, Sweden’s Riksbank and the Danish National Bank are the first ones likely to respond, others including the Bank of Japan and the People’s Bank of China will be closely monitoring the currency impact of potential ECB action.
Swiss National Bank
The SNB will meet on March 17, and any ECB measures this week will be key triggers for Swiss policy makers’ decision, according to Chris Turner, head of foreign-exchange strategy at ING. The SNB abandoned the 1.20 Swiss franc cap versus the euro on the assumption that ECB quantitative easing would manage to weaken the common currency.
Further policy action from the ECB this week opens up risk that the SNB will also be required to announce a tit-for-tat response, Rabobank senior foreign-exchange strategist Jane Foley says. The franc is likely to respond better to SNB’s negative interest rates and threats of intervention in periods of rising risk appetite, Foley adds.
The euro-franc exchange rate at 1.0750 is a key level to trigger SNB intervention, Nordea macro strategist Aurelija Augulyte says. The SNB could intervene in markets, and an extraordinary meeting to announce a rate cut would be possible if upside pressure on the franc becomes too strong. Still, central banks will probably think twice before cutting rates further, given the implications of negative rate policies, Augulyte adds.
On the other hand, UBS doesn’t think the SNB will respond with another rate cut should the ECB ease further this week, as the euro-franc exchange rate level matters more than the rate differential with the ECB, fixed-income strategist Nishay Patel says. Patel sees SNB policy staying on hold, though expects it will be responsive to franc gains. Swiss policy makers will probably counter a markedly stronger currency with intervention, he adds.
Sweden’s central bank has threatened currency intervention if the Swedish krona nears 9.00 versus the euro, and has been very aggressive with rate cuts, ING’s Turner says.
The Riksbank has the tendency to preempt ECB policy to reduce demand for for the krona, Rabobank’s Foley says, adding that the central bank’s recent threat to use intervention has also probably had an impact.
The strength of Sweden’s economy would support dissenters on the Riksbank’s executive board, who feel that policy is already sufficiently accommodative, and put further downward pressure on the euro-krona exchange rate, according to BNP Paribas analysts. BNP continues to bet on downside in the pair, targeting 9.15, and expects Swedish policy makers might start to intervene around that level.
Danish National Bank
Given the Danish krone’s peg to the euro remains in place, Denmark’s central bank is the most likely to act if the ECB is successful in pushing the euro lower, Rabobank’s Foley says, adding that she expects the currency peg to hold in the foreseeable future.
The DNB was forced to repeatedly cut rates last year as speculators tested the euro-krone peg, after the SNB abandoned its franc cap. In addition, Denmark’s currency is 24.5 percent overvalued versus the euro, according to OECD estimates, Foley says.
Other Central Banks
The Czech National Bank also has a cap in place for the koruna versus the euro, and the central bank will monitor currency inflows and could consider the use of negative rates, “something that had been considered very unlikely up until a month ago,” according to ING’s Turner.
ING sees a small probability the BOJ will react to any significant ECB action this week. The PBOC could be interesting to watch, ING foreign-exchange strategist Viraj Patel says. "If the ECB can help boost risk sentiment, then might be a timely opportunity for the PBOC to join the easing parade,” Patel says.