Forex Flash: Extreme tail-risk in EUR/CHF has and will continue, to moderate - JPMorgan (Barcelona) - On its Global FX outlook for 2013, JP Morgan anticipates that "a modest rebound in Switzerland's GDP in 2013 combined with strong growth in money, credit and real-estate prices, as well as near-record external surpluses will
increase the pressure on the SNB to exit its FX policy and realign monetary policy to the domestic economy."

As JPM analyst Paul Meggyesi notes: "The SNB cannot expect to exit its looser FX policy as smoothly as it did in 1979 – then it was bailed out by a doubling of Buba interest rates, which pulled DEM/CHF rose 20% above the SNB’s floor before the floor was removed. The risk in 2013, is that the ECB cuts its deposit rate below zero, which would cement EUR/CHF to the 1.20 floor."

Mr. Meggyesi adds: "The longer the SNB maintains its FX policy, the more FX risk that will be transferred from the foreign private sector to the SNB, and the smaller the danger of a position-driven collapse in EUR/CHF if/when the floor is removed."

While "extreme tail-risk in EUR/CHF has and will continue, to moderate" he says, the existence of a worst case risk scenario also exist. "The chief risk is that the peg is maintained longer than mid-year, due to renewed credit stress in the euro area, a protracted euro recession and very benign Swiss inflation. Rapid European economic would be innately bullish for CHF given the trade leverage of the Swiss economy..." the analyst concludes.

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