No more Swiss National Bank Currency Intervention in near-term?

The SNB’s quarterly monetary policy meeting concluded last week was a non-event. The central bank left the 3-month deposit rate at -0.75%. Can the markets still expect another Swiss National Bank currency intervention?

20 December, Orbex – The event was widely expected from the central bank. The SNB maintained that the Swiss franc was “significantly overvalued”. The central bank stands ready to intervene in the currency markets when needed. The Swiss National Bank’s deposit rate remains at a rate that is deeply in the negative territory among all the central banks of developed economies.

“The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive. Thereby easing pressure on the currency,” the SNB said in its statement.

However, the language of the SNB was seen to have changed in describing its intention as far as currency intervention was concerned. The statement said that the SNB:

 “will remain active in the foreign exchange market as necessary while taking the overall currency situation into consideration.” The phrase “while taking the overall currency situation into consideration” missing from its September statement.

SNB Signals more flexibility in the exchange rate

Some experts view this change in language as the SNB’s willingness to accept greater flexibility in the exchange rate’s movements. Signaling that another Swiss National Bank currency intervention could be less likely in the coming months.

However, the SNB Chairman, Thomas Jordan brushed aside the change in the language. He noted that it simply explained that the central bank would look at the broad developments to assess the degree of overvaluation among other currencies. In the press conference, SNB Chairman Jordan said, “that doesn’t mean you are less active or less focused, not at all,” speaking in reference to the language.

Swiss National Bank Currency Intervention during Brexit

The Swiss national bank is known for its active engagement in the currency markets. Besides pushing interest rates deep into the negative territory. The central bank has been known to intervene in the currency markets, especially during the June’s Brexit led volatility. Meanwhile, another Swiss National Bank currency intervention was recorded in the aftermath of the U.S. presidential elections. Due to the safe haven status enjoyed by the Swiss franc, the SNB has been aggressively seen discouraging investors from seeking the safety of the Swiss franc. Which is known to appreciate during times of market uncertainty. The SNB’s modus operandi has been to flood the market. With more francs by purchasing bonds and equities in foreign denominations.

While the move has been seen by the central bank to devalue the Swiss franc’s exchange rate, it has also led to the foreign exchange reserves ballooning. In November, the central bank’s forex reserves data showed a total of 648 billion Swiss francs. An estimate that is almost equal to the size of its economy.

Swiss National Bank Currency Intervention Swiss Forex Reserves: 648k (November 2016)

Impact of a strong USD on the Swiss Franc

However, the SNB’s signal of allowing for more flexibility was seen as a result of the recent shift in trend in the U.S. After the Swiss franc initially rallied as a safe haven after the election results; the U.S. dollar has surged strongly which has sent the Swiss franc weaker. At the press conference, the SNB chief called the Fed’s rate hike “very positive and a very good sign” for Switzerland and the global economies.

He said that the reason for the appreciation of the U.S. dollar against the Swiss franc and most other currencies was due to the “substantial increase in the long-term interest rates in the U.S. Particularly following the presidential elections,” the SNB chief said.

While the Swiss franc might seem weaker against the U.S. dollar. Many still see the exchange rate to be overvalued against the euro. Which happens to be the currency of exchange for most of Switzerland’s export partners. Speaking about the eurozone, Jordan said that the global outlook remained risky noting the uncertainties on the U.S. economic policy. Also, the elections in Germany and France next year alongside Brexit which he says will be “complex and arduous.”

About the contributor

This article was written by John Benjamin, Analyst at Orbex – an AtoZ Approved Forex Broker.

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