The Swiss National Bank (SNB) has surprisingly announced to abandon the intervention threshold for EUR/CHF of 1.20. Therefore the national bank will no longer intervene in the foreign exchange market to prevent the Franc from appreciate below this mark. Nevertheless, the SNB decided to continue its activity on the foreign exchange market for monetary policy purposes.

At the same occasion the central bank lowered the target range of the key interest rate – the Libor 3M – to -1.25 % and -0.25 %. As usually the mid of the range is targeted, this corresponds to a level of -0.75 % for the Libor 3M. To achieve this goal for the Libor 3M, the SNB applies an interest rate of -0.75% is on deposits held at the central bank excessing a certain exemption amount (for banks with minimum reserve requirement the exemption amount is the twentyfold of the required minimum reserve amount adjusted by cash reserves).

Market reaction :

EUR/CHF nose-dived to 0.86 immediately after the announcements of the SNB and bounced back to 1.05 after some minutes. At the moment EUR/CHF is trading at about 1.03.

The decision to give up the intervention threshold of EUR/CHF 1.20 comes as a big surprise. Triggered stops may be the prime cause of the imminent sharp appreciation. Nevertheless, as the Swiss Franc faced appreciation pressures before a return of the exchange rate to EUR/CHF 1.20 due to market forces is highly improbable.

The snap back of EUR/CHF from close to 0.86 to about 1.05 should be not taken as a signal that the Franc will soon stabilize at a new level for a longer period of time. Quite the contrary, in the coming weeks the market may firstly test where to find the new pain threshold of the SNB and secondly has to search for a new equilibrium under the current conditions. The SNB has not given the market any new guidance in doing so.

Thanks to the surprising abandonment of the credibly established intervention threshold the SNB will find it hard to achieve its intentions on the FX market in the future. The credibility has been damaged considerably which for the future has increased the required effort to influence the market pricing. To fend off unwelcomed depreciation pressure verbal interventions may not suffice in the future, but decisive currency market interventions will have to be conducted in our view. Moreover, the lasting effect of such interventions has to be questioned.

For a new assessment of the EUR/CHF we will publish an updated currency analysis in the coming days.

Financial analyst: Gottfried Steindl, CIIA

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