CHF: How is the SNB reacting to the Franc's strength? – Commerzbank

Last week, demand for safety even took EUR/CHF close to its all-time low. The strength of the Franc poses a dilemma for the Swiss National Bank (SNB). A stronger Franc ensures lower imported inflation, while at the same time it makes exports more expensive for domestic businesses. Little wonder, then, that Swiss exporters last week called on the SNB to counteract the appreciation, Commerzbank’s FX analyst Michael Pfister notes.

Rate cuts are likely to remain the instrument of choice

“The Franc has been appreciating steadily against the Euro for many years. Basically, the SNB can react by cutting interest rates or by buying foreign currencies and selling Swiss Francs. The only option for the time being is to intervene until the next meeting. Some commentators therefore claimed to have seen SNB interventions last week, citing the rise in sight deposits and the CHF movement.”

“Of course, it cannot be completely ruled out that the SNB intervened. However, the movement in EUR/CHF over the past week appears to have been very similar to that in USD-JPY, i.e. it is more likely to have been driven by safe-haven demand than by the SNB. It would also be more difficult to counter a market move in such an environment. It's better to intervene at strategically prudent times, as the Bank of Japan has done recently.”

“In my view, it is still more likely that the SNB will react with a rate cut for the time being. This is supported by the fact that the strength of the Swiss Franc has eased somewhat and EUR/CHF is back to around 0.95. As long as the demand for safe havens does not increase significantly, i.e. the EUR/CHF is not targeting new lows, interest rate cuts are likely to remain the instrument of choice.”