The Current State of the Swiss Franc
The Swiss National Bank (SNB) kept policy unchanged at the June policy review, leaving their benchmark interest of deposits at -0.75%. The target range for the three month Libor remained unchanged at -1.25% to -0.25%. The SNB repeated that it is ready to intervene on currency markets if necessary.
Inflation is expected to reach a low of -1.2% in Q3 this year, while the comments on the growth outlook are full of warnings about increased uncertainty about the world economy. The central bank sees the economy returning to positive growth in the second half of the year, however and demand should cushion the impact of the exchange rate, according to the SNB.
The SNB is prepared to intervene in the forex market in a difficult situation. Greek default would be an extremely difficult situation for Greek banks. SNB’s Jordan said that the franc remains significantly overvalued, repeating the boilerplate threat that the central bank stands ready to intervene in the FX markets if needed.
When the SNB decided it would no longer defend the EUR/CHF exchange rate prior to the QE announcement by the European central bank, the average range changed for the pair from 1.23 to 1.05. Recently the cross has remained in a 6-big figure range, and is likely to remain under pressure while the ECB continues to purchase assets. Given the recent weakness in many European economies, it is hard to see the Euro making any strong advances.
Economic data in Switzerland has been anything but robust. In June the KOF leading indicator came in much weaker than expected at 89.7 in the headline reading. This is well down below the median forecast of 93.7 and also down from the 93.1 reading of May. The unexpected reversal will be a concern for Swiss policymakers given the sharp appreciation of the franc.
Looking forward, Switzerland will not be able to be an island in Europe, but their currency should remain stable against the Euro. A weaker currency against the rest of the world will be helpful, driving exports which in turn should help drive growth.
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