In similar fashion to past meetings, SNB President Thomas reiterated the pledge to keep interest rates low in order to prompt economic growth and shift some attention out of the safe haven Swiss franc. In addition, the central bank head restated the bank’s commitment to protecting the 1.2000 franc ceiling implemented approximately 15 months ago.
In September 2011, the SNB activated a ceiling on the domestic currency in attempts to stem further appreciation against the Euro. At the time, the franc had gained by approximately 18% in the first 8 months of the year.
In addition, SNB members noted that growth forecasts still remained at the higher end of analyst forecasts. The Swiss economy is expected to grow by 1% in 2012, and between 1-1.5% in 2013, while inflation is expected to remain far below the 2% central bank target.
Post decision comments alluded to two key considerations:
Bank reserve diversification. Although SNB officials have pared back their currency interventions since September of this year, they remain committed to the defense of the 1.2000 figure against the Euro with “the utmost determination”. Officials also noted that they will begin to diversify the bank’s large holdings, bucking any consideration that the measure may become too burdensome for officials – leading the bank to ultimately concede on the barrier.
Potentially negative interest rates. Even with the depreciation of the Swiss franc by almost 0.10% since the end of the summer, the SNB will consider negative interest rates in deflecting attention away from the Swiss currency. The measure is being considered by policymakers as global economic risk in Europe “will persist for the foreseeable future and drive demand for secure investments” specifically the Swiss franc. This will be the bank’s likely last straw option, and will be reserved if the ceiling is broken.
So, what does this mean for the franc?
Simply put, don’t expect too much downside in the currency. Today’s comments continue to reinforce the 1.2000 downside support figure, which will likely act as the barrier to beat going into 2013. As a result, the level should act as impetus for a move higher in the near term. However, any further upside is contingent on a break of the 1.2183 September 17th swing high. Penetration above the figure would activate the next viable resistance at 1.2250.
Source: FXTrek Intellicharts