Intervention: Way to Weaker Franc or Bluff of SNB?

Swiss francThe Swiss franc is considered one of the most attractive currencies (if not the most attractive) nowadays as the strength of the franc makes it preferable as a safe haven. With all the financial turmoil in Europe and America the safety of the currency is in high demand among investors. But the Swiss National Bank announced last week that it’s going to take measures for taming the excessive appreciation of the Swiss currency. How this step will affect the franc? Let’s look at the history of the bank’s decisions to see how interventions usually affect the currency.

On March 12, 2009 the SNB decided to lower its main Libor rate, putting it the range 0 – 0.75%, while targeting the lower end of the range at about 0.25%.

    The Swiss National Bank (SNB) is making another interest rate cut and acting to prevent any further appreciation of the Swiss franc against the euro.

The franc reacted immediately, falling against the US dollar and the euro. USD/CHF jumped, but on the very next days it started to decline and on the fourth day after the intervention posted a sharp drop, that was stronger than rally after the intervention. EUR/CHF reacted more favorably to the monetary decision, showing stronger advance compared the dollar’s rally and keeping gains for almost the whole year.

As of June 18, 2009:

    The Swiss National Bank (SNB) is continuing the policy introduced in March whereby it implemented a firm relaxation of monetary conditions.

That decision hasn’t had any noticeable impact on the currency. The franc actually slumped on June 24, but the monetary decision apparently wasn’t responsible for that drop.

By September 17, 2009:

    The Swiss National Bank is maintaining the expansionary monetary policy which it initiated last March.

Anyway, the bank’s policy decision hadn’t any impact on markets whatsoever.

The global economic recovery was underway as of December 10, 2009, but the SNB was still concerned about the impact of the strong franc on Switzerland’s economy and announced:

    The Swiss National Bank is maintaining its expansionary monetary policy.

USD/CHF hasn’t felt the decision of Switzerland’s central bank as the dollar was already rallying against the franc. The strength of the franc against the euro was the main reason for concerns of the SNB, though, and EUR/CHF indeed changed its trend, but only several days after the decision and in the opposite direction to the central bank’s plans. The euro started its freefall against the franc at December 16 that continued till these days.

The story remained the same by March 11, 2010. The SNB announced:

    The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. Consequently, it is leaving the target range for the three-month Libor unchanged at 0.00–0.75% and intending to keep the Libor within the lower part of the target range at around 0.25%. It will act decisively to prevent an excessive appreciation of the Swiss franc against the euro.

The dollar again hasn’t felt the decision. The euro again dropped several days after the move.

The euro, together with the dollar, was falling against the franc as of June 17, 2010 and the Bank decided:

    The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. Consequently, it is leaving the target range for the three-month Libor unchanged at 0.00–0.75% and intends to hold the Libor in the lower part of the target range, at around 0.25%.

The currencies haven’t paid heed to the bank’s attempts to rein the franc’s appreciation.

The course of the SNB remained the same as of September 16, 2010:

    The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. It is leaving the target range for the three-month Libor unchanged at 0.00–0.75%, and intends to keep the Libor within the lower part of the target range at around 0.25%.

USD/CHF jumped after this announcement, but resumed its decline on the next day. EUR/CHF reacted more positively and was rallying till the end of October.

Switzerland’s central bank repeated its statement on December 16, 2010:

    The Swiss National Bank (SNB) is maintaining its expansionary monetary policy.

Unfortunately for the bank, the dollar and the euro were too busy sliding versus the franc and haven’t heard the statement.

The SNB repeated the same statement yet again on March 17, 2011 and said that:

    It is leaving the target range for the three-month Libor rate unchanged at 0.0–0.75%, and intends to keep the Libor within the lower part of the target range at around 0.25%.

This announcement had a short-term effect on USD/CHF and EUR/CHF, boosting the currency pairs, but the impact dissipated by the beginning of April.

The SNB reiterated its statement on June 16, 2011:

    The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. The target range for the three-month Libor remains at 0.0–0.75%, and the SNB intends to keep the Libor within the lower part of the target range at around 0.25%.

Again, the announcement remained without a noticeable effect.

The history lesson is finished. It’s time to asses the present behavior of the franc. The central bank announced on August 3, 2011:

    The Swiss National Bank (SNB) considers the Swiss franc to be massively overvalued at present. This current strength of the Swiss franc is threatening the development of the economy and increasing the downside risks to price stability in Switzerland. The SNB will not tolerate a continual tightening of monetary conditions and is therefore taking measures against the strong Swiss franc.

The SNB narrowed the range for the Libor rate to 0 – 0.25% and boosted liquidity for the Swiss franc. What impact of this move on the Swiss currency can be expected? But a better question is: should any effect be expected at all? How often a statement had any influence on the currency’s performance? Recalling all the previous expamles, one can say: not often and what impact it made was short-lived. Should this time be different from the others? It can be, in fact, as this time the bank intervened more aggressively than in the past times. But the words of the SNB itself signal that such outcome isn’t likely to happen:

    Since the SNB’s last quarterly monetary policy assessment, the global economic outlook has worsened.

That’s the sad truth: the global economy in turmoil, the US and European economies stand on the brink of a double-dip recession and threaten to drag the world economy down with them. Traders require safety in such environment and what currency can be better safe haven than the franc these days? Not the yen and definitely not the dollar. In fact, the last week showed that the franc hasn’t paid attention to the efforts of the SNB and this week the Swiss currency will likely continue to show signs of growing strength. The only threat to the franc could be some news that would boost risk appetite of Forex market participants.
Intervention: Way to Weaker Franc or Bluff of SNB? Intervention: Way to Weaker Franc or Bluff of SNB? Reviewed by Sopheap Chhin on 6:00:00 AM Rating: 5

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