Swiss franc sees wild ride on central bank talk

The Swiss franc continued to show major volatility on Tuesday, as the country's central bank signaled that it had not completely given up intervening in the currency markets.

The Swissie fell to its lowest level against both the euro and the dollar since the Swiss National Bank (SNB) dropped its three-year peg to the euro. The Swiss franc slipped to 1.0345 against the euro and 0.9126 against the dollar, although by midday GMT it had pared some losses and was trading at 1.0190 against the euro and 0.9022 against the dollar.

Comments by Jean-Pierre Danthine, the SNB's vice-chairman, were credited for the spike. He told the Swiss national newspaper TagesAnzeiger that the central bank was still looking to intervene in the foreign currency market to ease monetary policy, despite ditching its currency cap on January 15.

"Giving up the cap means a tightening of monetary policy. We accept this, but only up to a point. We are fundamentally prepared to intervene in the foreign exchange market," he said in the interview, according to Reuters.

With the currency proving so volatile, many investors are refraining from placing bets on where the Swissie could trend in the medium term. Geoffrey Yu, senior foreign exchange strategist at UBS, told CNBC via email that parity with the euro was his near term target, but that it was more of an "anchor point."

The SNB rocked markets earlier this month when it scrapped its currency peg. The Swissie soared against the euro by around 30 percent as investors piled into the currency which is traditionally known as a "safe-haven." The move meant the SNB could begin to curb its massive purchases of euros, which it was buying to maintain the peg.

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However, currency experts are now speculating that the central bank might still be intervening in the market. This could explain why there wasn't a bigger move in the euro last week when the European Central Bank (ECB) announced its major bond-buying program.

New data on Tuesday showed that the amount of cash that banks hold with the SNB rose last week. These "sight deposits" can be used by the central bank to intervene with its own currency.

"It seems clear it's fighting against further destabilizing inflows," Simon Derrick, chief currency strategist at Bank of New York Mellon, told CNBC via email.

A man holds a 100 Swiss franc bank note in front of an ATM in Bern.
Denis Balibouse | Reuters

But Derrick suggested that any intervention might have more to do with concerns over a Greek exit from the euro zone, following anti-austerity party Syriza's win in general elections on Sunday.

"I note the substantial downward pressure on the Greek banking sector over the past 24 hours," he said. "That indicates that the collective wisdom is the negotiations between the new Greek government and the 'troika' could end poorly."

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Sebastien Galy, a senior currency strategist at Societe Generale, said the SNB could now be realizing that Switzerland was facing real deflationary pressures because of its own shock decision to scrap the currency peg.

"Evidence from the banking and manufacturing sector suggests the SNB has under-estimated both the foreign exchange impact and deflationary pressures," he said.

"Competition for lower prices typically hits cars first as garages specialize in imports, while ticketing laws make arbitrage of retail goods very difficult."