Swiss Tit for Tat With ECB Hinges on Currency-Market Fallout

  • Euro-area easing could push up franc, force SNB response
  • Franc dropped to weakest in year versus euro in early February

Thomas Jordan’s next move once again hinges on the franc.

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With the currency near its weakest level in a year, the Swiss National Bank president has proven he can hold his ground against markets. But global growth concerns and an equity rout could increase pressure, making Jordan’s job more complicated.

He also has to contend with the European Central Bank, which may pile on more stimulus next month and, potentially, weaken the euro versus the franc. While a majority of economists in Bloomberg’s monthly survey said the SNB may need to cut rates further below zero or intervene more heavily if the ECB acts, the caveat for action would be a surge in the franc.

“The reaction of the SNB will probably depend on the reaction of the exchange rate,” said Maxime Botteron, an economist at Credit Suisse Group AG in Zurich. The most likely response to more ECB easing “is through foreign exchange interventions. However, we would not rule out an interest rate cut if the franc were to appreciate sharply.”

Jordan and his fellow rate setters have been contending with the fallout from euro-area decision-making for years, though they avoided having to adjust policy in December when new ECB measures fell short of expectations. That announcement failed to push the franc out of what economists typically consider the SNB’s comfort zone of below 1.07 per euro.

Yet with euro-area inflation so weak, ECB President Mario Draghi may now over-deliver at the central bank’s next meeting on March 10. That could mean the SNB, scheduled to meet a week later, is in for a fight this time around, though the franc’s recent weakness against the euro has given it more leeway.

The Swiss currency’s reaction to the latest gyrations in global markets has raised questions about its traditional role as a haven. It traded as low 1.11997 per euro on Feb. 4, and while it has appreciated since, it’s still far from the levels of a year ago after the SNB abandoned its cap.

It traded little changed at 1.10083 per euro at 12:34 p.m. in Zurich on Monday.

Soeren Hettler, a senior foreign-exchange analyst at DZ Bank AG in Frankfurt, said it’s not simply about a reaction to the ECB, but will depend on the ripples into the currency market.

“If the franc appreciates markedly against the euro, the SNB will take its own measures,” he said. “If it does not, nothing has to be done.”

Should the ECB reduce its deposit rate, now at minus 0.3 percent, roughly three-quarters of economists surveyed by Bloomberg expect some form of SNB action. If policy makers in Frankfurt simply adjust their bond-buying program, economists primarily expect Swiss currency interventions.

Jordan signaled last week that there’s room to further cut the deposit rate, currently at minus 0.75 percent. According to the poll, the SNB can go as low as minus 1.25 percent. The central bank also has some firepower on interventions, with economists saying it can expand its balance sheet to 128 percent of gross domestic product, from roughly 100 percent now, before its credibility begins to suffer.

“The SNB must be happy about where the current Swiss franc exchange rate is against the euro,” said Alan McQuaid, chief economist at Merrion Capital in Dublin. “A lot of ECB action in March is already priced in, so the euro is unlikely to weaken too much unless we get another bazooka moment from Mario Draghi.”

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