The Swiss Franc finished the week almost-squarely unchanged against the Euro and US Dollar, but key intra-week volatility arguably shifted market forecasts in favor of CHF weakness. The recent Swiss National Bank interest rate decision underlined the bank’s resolve to protect against the risk of deflation in the domestic economy.
[B]Swiss Franc Weakness Likely on Credible SNB Intervention Threat[/B]
[B]Fundamental Forecast for Swiss Franc: [/B][B]Bearish[/B]
- Swiss CPI Inflation Plunges to 22+ Year Low
- Swiss National Bank Pledges “Firm Action” to halt CHF appreciation
The Swiss Franc finished the week almost-squarely unchanged against the Euro and US Dollar, but key intra-week volatility arguably shifted market forecasts in favor of CHF weakness. The recent Swiss National Bank interest rate decision underlined the bank’s resolve to protect against the risk of deflation in the domestic economy. Recent Producer and Import Price Index inflation numbers registered at 22-year lows, and the dangers of deflation are all too clear. To that end, the SNB reiterated its desire to keep Swiss Franc appreciation in check. Though it set no firm limits on CHF levels, it made its intentions quite clear through intervention at the EUR/CHF 1.5000 level. The pair instantly rallied over 140 pips in a matter of moments—setting a clear “line in the sand” for EUR/CHF bears. Whether or not the SNB will successfully defend said level remains up for debate, but it will be critical to monitor all official references to Swiss Franc exchange rates.
Traders expressed their displeasure with SNB actions in bidding the CHF higher through the week’s close, and it is not entirely clear that central bankers can sustainably defend the EUR/CHF 1.5000 mark. Markets likely remember the Reserve Bank of New Zealand’s failed attempts at FX market intervention in June, 2007. The RBNZ tried to halt further New Zealand Dollar appreciation through aggressive selling, but the overall uptrend in risk sentiment and aggressive yield-seeking behavior kept the NZD well-bid. There was a key difference in these two cases, however; the RBNZ was handicapped by high domestic inflation and saw clear risks in expanding the supply of New Zealand dollars. Given exceedingly low domestic price pressures, the SNB could likely kill two birds with one stone: expand the monetary supply to boost prices and flood the FX markets with CHF to avert further appreciation.
The threat of continued SNB market intervention seems credible, and FX Options markets show that traders are geared up for modest EUR/CHF strength. Our outlook for the Swiss Franc subsequently remains bearish, and it will be especially important to watch the Euro/Swiss Franc exchange rate through upcoming trade. Further tests of the 1.5000 mark could invite aggressive Euro buying/Swiss Franc selling out of Switzerland. - DR