Three years, three months and four days after the Swiss National Bank abandoned its EUR/CHF exchange-rate floor, it has finally happened. For the first time since 15th January 2015, the currency pair climbed back over the EUR/CHF 1.2000 mark yesterday evening. Even the Swiss, who are well-known for their reserve, will probably have responded to this event with a certain degree of euphoria since they can now regard the difficult and controversial “exchange-rate floor” chapter as being definitively closed.
Interestingly, it has, for the most part, been factors from outside Switzerland which have had a major bearing on the trend in the euro-Swiss cross since the second quarter of last year (it should be recalled that the exchange rate was still standing in the vicinity of EUR/CHF 1.0650 around one year ago). The euro has gained traction against the Swiss franc in particular on the back of the outcome of the French presidential elections, which was pleasing from an EMU point of view, and due to the prospect of the European Central Bank putting an end to its ultra-expansionary monetary-policy stance. By contrast, the sanctions imposed by the USA against Russian oligarchs have probably been the factor which triggered the euro’s latest bout of appreciation. After all, we are hearing more and more reports about Swiss banks and enterprises scaling back the deposits and stakes of wealthy Russians so as not to get into the firing-line of the US administration. It is true that there is no hard-and-fast proof for this thesis; however, significant alternative stimuli are not to be observed.
No prelude to a swift shift in the monetary-policy alignment
What is certain is that memories of the franc’s strength over the past few years are not simply going to fade away to nothing in the minds of Switzerland’s monetary custodians. The expansion in the central-bank balance sheet (by well over CHF 300 billion, very largely as a result of forex-market interventions, to a current figure of approximately CHF 820 billion) was too drastic, and the key interest rate (at a current level of -0.75%) too low, for that to happen. Meanwhile, there are no indications that the SNB is intending to turn its back on the world’s lowest interest-rate level any time soon. Thomas Jordan, Chairman of the Governing Board at the Swiss National Bank, was at pains to counteract burgeoning expectations that a paradigm shift in the direction of a less accommodative monetary-policy stance could be forthcoming in the Alpine republic in an interview yesterday. Despite the franc’s recent bout of weakness, his opinion is that “There’s no need to do anything regarding monetary policy at this moment.“ Jordan added: “We remain very prudent.“ Since our economists at DZ Bank Research see the Swiss inflation rate continuing to undershoot the 1% (yoy) mark both this year and next, this can be viewed as a thoroughly credible announcement, especially for as long as the European Central Bank does not have any key-rate increases on its radar. The Swiss central-bank officials are probably too fearful of a renewed bout of pronounced franc appreciation relative to the common European currency.
Nevertheless, the Swiss National Bank could take a first small step towards normalising its policy stance at its next meeting in June. Up to now, the monetary authorities have regarded the franc exchange rate as being “highly overvalued.“ With the euro-swiss cross rate now in the vicinity of EUR/CHF 1.20 (a level which the SNB considered to be “fair” just over a year ago) and with the trade-weighted exchange rate only marginally higher than the level prevailing from 2012 to 2014, there is doubtless leeway for Switzerland’s central bank to gradually move away from this assessment. The consensus opinion on the money markets is that a first tightening step will come through in spring 2019. This perception will probably prove to be somewhat too optimistic, since we do not expect the SNB to tighten its policy before the second quarter of next year. However, speculation about a sea-change in Swiss monetary policy will probably already begin to gather momentum around the turn of the year.