Jane Foley, Senior FX Strategist at Rabobank, explains that in Asian hours yesterday morning, talk of SNB intervention in USD/CHF circulated – though this was unconfirmed as the CHF has pulled off its strongest levels vs. both the EUR and the USD as a consequence.

Key Quotes

“The SNB is unusual among G10 central banks in maintaining intervention as a policy tool.”

“Switzerland does have a couple of very good excuses for maintaining intervention as a policy took.  Firstly, the ECB is involved in a huge asset purchase programme which the SNB cannot imitate given the small size of the Swiss bond market.  The value of EUR/CHF is crucial for Switzerland’s export markets, hence the SNB has been forced to consider different options to try and lessen the impact of currency strength on its trade balance and on inflation.”

“On the back of a strong currency the SNB has struggled with deflation and disinflation for year. Few would argue with the fact that the CHF remains significantly overvalued on a number of measures. Despite the strength of the CHF, Switzerland is often cited as the most competitive country in the world with labour market efficiency and business sophistication and innovation cited as particular strengths.  Switzerland’s trade surplus rose moderately in November 2017 to CHF2.63 bln from CHF2.45 bln in October. In November Switzerland had a trade deficit with the Eurozone of around –CHF1.7 bln and a CHF1.7 trade surplus with the US.  Notably, however, the value of trade with the US is around 30% of the total with the Eurozone.”

“If the US Treasury was to label another currency a currency manipulator it would imply that three criteria had been hit.  These are that the country has a trade surplus with the US of at least USD20 bln, a current account surplus of at least 3% of GDP and net buying of FX greater than 2% of GDP over the previous 12 months.  Last year Switzerland’s current account surplus was around 8.8% of GDP.  That said, it seems unlikely that it will ever meet all three of these criteria.  Comments from Swiss Finance Minister Maurer in a newspaper article over the weekend that “the signals are clear: they aren’t planning any sanctions” and “they know our situation and understand” appear to indicate that the Swiss government has had some reassurance from the US Treasury that there will not be any push back regarding Switzerland’s currency policy.  This would indicate a green light for maintain intervention as a policy for the time being.”  

“Overtime we expect that the value of the CHF will continue to drift lower vs. the EUR.  This assumes that risk appetite remains strong (the CHF retains strong safe haven properties) and that the market assumes that the end of the ECB’s QE programme is nearing.  We see EUR/CHF potentially reaching 1.20 on a 12 mth view.  Given our expectation that the EUR will also trend higher vs. the USD, this implies a fairly steady range for USD/CHF around the 0.94 area.”  

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