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CURRENCY ANALYSIS

Swiss Franc

A gradual depreciation against the euro is expected

Swiss Franc, CHF, gradual depreciation, against the euro, expected, Currency Analysis, fx trader, forex

25 Mar 2015

It has been just over a year since the Swiss National Bank removed the exchange rate floor (15 January 2015), and its new monetary policy strategy is proving effective. The central bank’s goal was essentially to prevent excessive appreciations of the Swiss franc in the presence of external shocks capable of triggering purchases of francs as a safe haven. At the time, the shock was the risk of a sharp depreciation of the euro against the dollar (EUR/USD), given the prospect of the ECB launching its first QE programme, as then proved to be the case.

The new strategy, still in place, has two pillars: (1) negative interest rates, geared to making investments in francs less appealing, and (2) commitment to intervene directly on the forex market if necessary.

In the course of the past year, the franc gradually weakened against the euro, from EUR/CHF 1.03 (monthly average in April 2015) to 1.10 (average in February 2016). In particular, evidence of the franc’s de-correlation from the euro last year came between the end of October and the beginning of December, when the euro declined from (almost) EUR/USD 1.15 to 1.05 in view of a new slackening of monetary policy by the ECB (first expansion of QE in December). The risk was that the EUR/CHF could track the EUR/USD downwards with a new appreciation of the franc. The franc, on the other hand, remained stable in the EUR/CHF 1.08 area on average. Since the floor was removed, the SNB has not even had to cut rates any further. After lowering them into negative territory in December 2014, it cut them by 50bps in January 2015 (while also removing the floor), and since then has kept them unchanged at between -1.25% and -0.25% (3m Libor target range).

Recently, however, as new concerns have emerged over the global scenario at the beginning of the year, prompting several central banks, with the ECB at the fore, to step up monetary stimulus, the SNB has announced that it is also ready to make monetary policy more accommodative if needed. For the SNB, the problem has mostly arisen following the new measures put in place by the ECB, which this month (10 March) expanded QE, literally reduced the refi rate to zero, and cut the deposit rate deeper into negative territory. As well as prospecting the possibility of cutting rates further into negative territory, the SNB had started to consider other policy instruments as well: specifically, the idea of lowering the exemption limit on bank reserves, currently at 20 times the minimum required reserve ratio. The lowering of this threshold would increase the amount of reserves to which negative rates apply.

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