Analysis-Swiss franc rises to six-year high as central bank backs Reuters

By John Revill

ZURICH (Reuters) – The Swiss National Bank is no longer obstructing the appreciation of the franc, according to data released on Monday, in a striking change, given that the safe haven currency has risen to its highest against the euro. more than six years.

The apparent attitude of the central bank will confuse investors accustomed to the mantra of the SNB that would struggle with negative interest rates and foreign exchange purchases with teeth and nails.

On Monday, the franc rose to 1.0426 against the euro – the highest level since July 2015 – with the emergence of a new COVID-19 variant, driven by low Swiss inflation and weakness in the euro.

The level has not risen since the 1: 1 euro francs arrived briefly in January 2015 following the SNB’s latest policy change.

But the latest data on sight deposits – a proxy for SNB interventions – rose by just 94 million francs last week, part of the forex purchases seen last year.

One factor in the small rise could be the removal of cash from bank customers, economists say, which happens every year before Christmas and reduces the amount of money banks see with the SNB.

“However, the rise of less than 100 million francs shows that the SNB chose not to defend the 1.05 level,” said economist Karsten Junius J.Safra Sarasin.

The development could mean that the SNB has stopped reducing the franc to its current level, due to good inflation in Switzerland and a strong economy in the country.

Instead, the central bank may retain its power to avoid a quick and high valuation, economists say.

The SNB declined to comment on Monday’s data and the economists ’reaction.

“If the franc stays at this level of around 1.05, a little higher, a little lower, the SNB won’t do much,” said Thomas Stucki, investment director and former manager at St Galler Kantonalbank. SNB’s foreign currency reserves.

SEEING PARITY “IN THE NEXT 2-3 YEARS”

“They will prevent movement from 1.04 to 1.03,” he added. “Then they will step up interventions.”

Frank was on his way to parity, Stuck added.

“It is clear that the development of inflation in Europe and Switzerland will increase exponentially over time,” he said. “We don’t expect parity to be achieved next year, but we think it will happen in the next two or three years.”

Over the weekend, board member Andrea Maechler said the SNB was monitoring the level of the franc, even though the central bank did not target a specific rate, he said.

Swiss inflation is within the SNB’s definition of 1.2% price stability and reduces the need for action.

“The SNB’s long-term policy remains the same: to deal with a strong overvaluation of the Swiss franc. The question, however, is what a strong overvaluation means,” said UBS economist Alessandro Bee.

Due to much stronger inflation in the eurozone than in Switzerland, the fair value of the franc rose to 1.11 euros from 1.20 last year, he said.

“From this perspective the 1.05 franc is not overvalued,” Bee said. “This ensures a lower intervention threshold for the SNB, although it is unclear exactly where this new threshold is at the moment.”

The SNB’s position will be tested in the coming days, especially if the omicron variant of coronavirus increases the demand for francs.

“Now the situation is getting more and more complicated for the SNB,” said ING economist Charlotte de Montpellier. “There is a risk of a renewed flight to safety and a risk of strengthening currencies that are considered safe havens, and therefore of the Swiss franc.”

So far, the SNB has done well not to spend too much money on the defense of the franc, said economist J Safra Sarasin Junius.

“I think they will try to stop any rating at 1.03. That would be the last line of defense before parity,” he said.