The Swiss franc fell on Tuesday after a senior official at the Swiss National Bank was quoted as saying the central bank was still prepared to intervene to keep the currency relatively weak.
The euro jumped to over 1.03 against the franc, from 1.0150 in early European trading.
The central bank accepted that the dropping of the cap on the franc against the euro represented a tightening of policy, but it remains ready to intervene in the currency market, SNB Vice President Jean-Pierre Danthine told Swiss newspaper TagesAnzeiger in an interview.
He added that the central bank had no choice but to abandon its 3 1/2-year-old cap, as the common currency was no longer a suitable reference for the franc.
“My six to 12-month view is still for around 1.05 francs to the euro. I really doubt that the SNB will just be comfortable seeing the currency around or below parity for a sustained period of time,” said Jane Foley, an analyst at Rabobank.
The Swiss central bank’s move to scrap the franc cap came as upward pressure on the currency had forced it to intervene increasingly in the currency markets, and the volume of interventions could have reached 100 billion francs ($166.26 billion) in January, Mr. Danthine was quoted as saying.
A European Central Bank bond-buying program could swamp the currency markets with euro liquidity, and the “natural runoff for this liquidity would have been into the franc,” he said.
Mr. Danthine refuted suggestions the SNB’s move represented a currency war, and said while the ECB’s decision to introduce quantitative easing was a monetary policy decision, it would have side-effects for other currency regions.
“Switzerland is affected by quantitative easing in Europe,” he said.
Asked whether the SNB should consider a new currency strategy, Mr. Danthine said Singapore’s linking of its currency to a trade-weighted basket of currencies deserved closer attention.
“Other small and open economies like Sweden and Norway have managed well over the years with flexible exchange rates,” he said.
As far as the SNB’s timing of its exit from the franc cap was concerned, Mr. Danthine said the central bank had no choice as “forward guidance” wasn’t possible.
Mr. Danthine had told Swiss television three days before the scrapping of the cap that it remained a cornerstone of its monetary policy.
“Prior to my interview there had been press speculation about an exit from the franc cap, which on Monday had led to flows into the franc. If I had canceled the interview or raised doubts about the cap, this would have intensified flows enormously,” he said.
The SNB’s currency reserves have swelled to almost 500 billion francs since the minimum exchange rate was imposed in September 2011.
The impact of the exit from the franc cap on the Alpine country’s economy isn’t something for which the SNB is responsible, but in general productivity will need to be increased, Mr. Danthine said.
“Economically things aren’t that bad. The U.S. is getting stronger, lower oil prices should provide support and the quantitative easing in Europe could have positive effects,” Mr. Danthine said.
In addition to scrapping the franc cap, the SNB also raised the fees it will charge banks to deposit funds with the central bank, although Mr. Danthine said it is difficult to say whether the SNB’s negative rate of -0.75% can be lowered further.
Source: MarketWatch
