Interesting...
The sharp drop in USDCHF has been due to dollar
weakness rather than franc strength. In fact, on the Swiss
side things point to a weaker franc. Against the euro this
Franc strength has become a political issue in
Switzerland. Even if we do not expect any direct impact
on economic policies, the SNB has likely become even
The SNB has recently lowered its rates on short-term
money market operations. This may have been targeted
at increasing the yield differential to the Eurozone,
We think that the risks to our 3m EURCHF 1.28 forecast
are now on the upside and we also stick to our 1.02 view
Franc politics
The most recent drop in USDCHF seems essentially a
dollar story. We continue to think that more broadly the
dollar will rebound over the next few weeks and months,
and that long USDCHF is a good way to express this view
1.
On the Swiss side, however, there have been few if any
reasons for a stronger franc and we have indeed become
significantly less bullish than we were for most of 2010.
The first point to mention is the much increased political
noise about franc strength. It is highly unusual in
Switzerland that the Economy Ministry would call industry
and union representatives for a ‘summit’ on the franc (14
Jan), and for the government to discuss the issue
prominently in one of its weekly meetings (19 Jan). It is
also rather unusual for a major representative of one of the
three government parties to call for the resignation of the
SNB President amid book losses on the back of last year’s
FX interventions. It is very important to note that none of
this is likely to have a material impact on Swiss monetary,
exchange rate or even economic policy more broadly. The
independence of the SNB certainly remains a cornerstone of
Swiss economic policy and the government as well as the
vast majority of senior politicians miss no opportunity to
acknowledge as much. However, we do think that the SNB
may not be entirely insensitive to the animated discussions
and may at least sound more concerned about Swiss franc
The question is what the SNB could do if Swiss franc
strength indeed were to once again become a threat to price
stability, i.e. trigger a risk of deflation. We have argued
not currently an option anymore for the SNB. President
Hildebrand argued a couple of weeks ago that the danger of
deflation was ‘largely gone’. Only substantially worse-thanexpected
economic data could change this assessment.
Apart from intervening on the FX markets, the SNB has few
if any options left
2. In fact, the only palatable measure may
be to increase franc liquidity in the market, which would in
turn push forward-implied yields further into negative
territory. This happened in mid-2010 as a side effect of the
massive FX interventions, pushing implied yields to as low
as -160bp (Chart 1). The SNB then quickly remedied the
situation by mopping up the excess liquidity with bill
issuance and stepped up reverse repo activity. As a result,
the excess liquidity as showing up in sight deposits dropped
from a peak of CHF103 bn to now around CHF27 bn.
Interestingly, the SNB over the last few weeks has
continuously lowered the rates on its short-term money
market instruments. The 1-week reverse repo now stands at
just 9bp from a peak of 14bp in autumn last year while the
28-day SNB Bill dropped to just 11.4bp last week (Chart
2). The SNB has not publicly talked about this trend but
one interpretation could certainly be that the SNB has
release pressure on the franc. The move higher in Euro
rates may have been seen as an opportunity to widen the
differential to Swiss rates by keeping the later low. Indeed,
the differential between 3m Euribor and CHF Libor has
widened to as high as 88bp from as low as 39bp last year
(Chart 3). As a result, despite tightening expectations rising
even for the SNB along with a recently more hawkish ECB,
Conclusion
The current developments in Egypt have demonstrated that
even while global macroeconomic risks may be viewed as
under control, geopolitical tensions can rise somewhere in
the world at almost any moment. The Swiss franc will
remain the safe haven of choice for such occasions. Beyond
that, however, we argue that the main reason for the recent
drop in USDCHF has been entirely dollar driven and that
on the Swiss side things have become less bullish. In
particular, we would point to what appears to be a subtle
monetary easing by the SNB, which has recently moved
rates lower on short term money market operations. In fact,
rather than taking a cue from the ECB and sounding more
hawkish, the SNB appears to have taken the opportunity to
widen the yield differential to the Eurozone. As a result, we
now see the risk to our 3m EURCHF forecast of 1.28 on the
upside and would not be surprised if the cross moved
substantially above 1.30 over the next few weeks. On the
USDCHF side we stick to our 1.02 forecast as we expect the
FEN 31/01/2011