Should This Floor Be Supported?
The Swiss National Bank has left its euro-Swiss franc floor in place. Is this really necessary?
It's been a year since the Swiss decided to take dramatic steps to curb the economy-crushing rise of their currency by intervening in the currency markets and setting a floor against the euro, and they just opted to keep it in place.
But with Europe finally sending out green shoots of good news, is it time for the Swiss to consider lifting the floor?
The peg is expensive for the Swiss National Bank to maintain. And when the euro has flagged, the shift has thrown off the mix of currencies in the central bank's reserves, which creates its own pressure on the currency markets.
Then there is the matter of the euro's current level.
Citigroup has developed a formula to determine where the euro would be trading relative to the Swiss franc without intervention. According to Steven Englander, global head of G10 currency strategy, "for the first time since January we are seeing conditions that would justify EURCHF at, or slightly above, the 1.20 floor based on market perceptions of risk and other drivers." The shift has been rapid, Englander notes: "The improvement in euro zone conditions over the last six weeks has been so dramatic that these factors suggest that EURCHF could justifiably be above the floor, even without CHF buying."
Still, just as the euro's rise has been rapid, its past slides have been dramatic as well, and Jens Nordvig, head of fixed income research Americas and global head of currency strategy at Nomura , notes that the floor has "avoided extreme and disruptive currency overvaluation." He also points out that the Swiss franc is actually stronger at the moment on a trade-weighted index basis, and the Swissie-euro pair is still close to the target band.
Marc Chandler, chief currency strategist at Brown Brothers, says the floor has paid off in other ways as well. Even with the peg, the Swiss are lowering inflation and growth forecasts, suggesting the currency is still strong enough to weigh on the economy. Also, before the Swiss put the peg in place, speculators were putting heavy upward pressure on the Swiss currency, buying it on expectations the euro zone's problems would send it higher. Chandler notes that official data on market positions suggest "that the SNB has succeeded in squeezing out much speculative influence."
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