SNB Policy and Brexit Implications

Interview with Yann Quelenn,  ‎Market Strategist at Swissquote, who talks about the SNB’s efforts to stabilize the CHF and looks at Brexit implications for the Swiss Franc.

Interview, Yann Quelenn, Fundamental Analysis, fx trader, forex

FXTM: Looking back at last year’s Swiss market turmoil, what is the economic and political cost of the January 2015 SNB decision?

YQ: The abandon of the peg was necessary. It was clearly too expensive for the Swiss National Bank. The choice was made not to enter directly in a competitive devaluation against the European Central Bank. The SNB has decided to leave the market adjust itself. The economic cost is a deflation period that should continue over the medium-term. Downside pressures on prices are now pretty significant because of the weakening of the EUR which makes Swiss product less affordable. I think it is unlikely to see inflation at a decent level within the next few years. Politically, the SNB still has its credibility. The SNB really did not have many other options outside removing the EURCHF floor. You cannot go all-in against the European Union. Mounting European uncertainties had triggered a sustained capital exodus not predicted by the SNB making the peg not sustainable. When you are a small country, you must be able to anticipate and to create surprises especially against significantly larger economies. This reactive strategy has been employed by the SNB over the past year and will continue heading to Brexit.

FXTM: Negative interest rates and currency interventions are the main policy tools used by the SNB to keep the franc weak. Do you think that the SNB has room left to push interest rates further into negative territories?

YQ: No! Even if Chairman Thomas Jordan is saying the contrary. There is the non-negligible risk that lowering interest rates further could trigger a bank run to hoard cash rather than selling the Swiss franc. If there is an intervention, there won’t be much on the rates. In addition, massive expanding of the central bank’s balance sheet leaves little room for meaningful direct FX intervention. Markets are fully aware of this fact. Other tools are at the disposal of the Swiss Central bank as a quantitative easing. However, I believe that entering in the same monetary policy as the ECB is not an option for the SNB. Indeed, uncertainties on the European outlook show that a deeper euro crisis is likely possible and would then ruin all efforts to stabilize the Swiss Franc. It is nonetheless true that reducing the exemptions to negative rates may be a simple strategy but that would certainly not be a significant weapon during periods of rapids devaluation and long-term effect on domestic savers are skewed to the downside.