Right before the Swiss National Bank’s (SNB) rate decision and monetary policy assessment, no one wanted to hold on to the Swiss franc. Investors were selling it like it was going out of style because rumor had it that the SNB was going to make a big announcement to defend its currency.
Some believed that the central bank would raise the EUR/CHF floor from 1.2000 to 1.2500. Heck, a few investors were even calling for an increase to 1.3000!
Others speculated that the SNB would recycle one of its old strategies from the 1970s and use negative interest rates to snuff demand for the franc. Doing so would’ve meant that foreign investors would actually have to PAY interest to keep their money in Swiss banks.
Naturally, all this speculation led to weakness in the franc, which in turn gave EUR/CHF a boost. As a matter of fact, in the hours leading to the rate decision and monetary policy assessment, the pair rallied from 1.2300 to just under the 1.2400 handle.
But what happened after the SNB made its big announcement? Well, let’s just say that the tables turned and the markets couldn’t get enough of the franc!
Franc bears turned into bulls as the SNB announced that it will keep its target range for the LIBOR at 0.0-0.25% and that the floor for EUR/CHF will remain at 1.2000 for now. Ahh yes, the old wait-and-see approach!
As a result, EUR/CHF quickly shed almost 150 pips before it stalled just above the 1.2250 handle.
But just because the SNB decided not to re-peg EUR/CHF at a higher level doesn’t mean that it’s letting its guard down. The central bank made it clear in its statement that it still feels that the franc is trading uncomfortably high. As such, it reiterated its commitment to act on weakening its currency if and when the economic outlook and the risk of deflation call for action.
My take on the SNB’s decision? It was a smart move! Raising the floor for EUR/CHF isn’t as easy as it sounds; there are dangers involved.
The economic uncertainty surrounding the euro zone suggests that the franc could come under significant buying pressure from safe haven flows in the coming months. The problem is if the SNB raises the floor for EUR/CHF, it may have a more difficult time supporting price at 1.2500. Now, consider this: if the market overwhelms the SNB and breaks past the 1.2500 mark, who’s to say it won’t eventually summon the courage to break down the 1.2000 handle? Hah!
In this humble old man’s opinion, we should just take the SNB’s decision at face value: the central bank is extremely determined to keep the franc from rising, but it’s not quite ready to jump the gun and raise the floor for EUR/CHF yet.
That being the case, I think EUR/CHF will most likely continue to range between 1.2100 and 1.2400…. that is, until the SNB gives a more definitive sign of what it wants to do next!