Trading el Franco Suizo
“The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%. It is moving the target range for the three-month Libor further into negative territory, to between –1.25% and −0.25%, from the current range of between −0.75% and 0.25%. “
Last January 15th, the Swiss National Bank (SNB) decided to withdraw its almost 3-year-old floor for the Swiss Franc, for which they were willing to buy unlimited amount of Euros in exchange of Swiss Francs. This decision was without precedents, not only because it was the main tool the Central Bank was using in order to ease financial conditions, but because of its impact in the local economy and in the financial marketplace.
During the debt crisis in Europe that initiated back in 2010, there were massive outflows from the Eurozone due to several reasons. One of them was because of fears about Greece leaving the monetary union, setting precedents that the Eurozone was a “failed” project, and potentially, opening the door to some other countries to leave the union.
Because of its geographical and financial closeness, Switzerland was one of the main receivers of those outflows, which in turn appreciated considerably the Swiss Franc. Due to its economical “openness”, a meaningful appreciation of the CHF crosses could have had negative consequences in the economy (via a loose of competitiveness in the export sector) as well as in inflation. It was particularly important for the Central Bank to intervene because apart from the direct effect of the currency appreciation, the Eurozone was just about to experiment a very bad recession.
The situation is different from 5 years ago since this time around market participants are very aware of the situation, and consequently, positioning in the financial markets reflects that fact. On the other hand, contagion has been limited, partly due to the fact that the European Central Bank (ECB) and some other European institutions have implemented different backstops such as the ESM (European Stability Mechanism), EFSF (European Financial Stability Facility), SMP (securities markets programme), QE (Quantitative Easing) just to mention a few. Just clarifying, it would be very difficult to say beforehand that a default in Greece would not have a meaningful impact in the financial marketplace, but given market reaction to recent developments, we can conclude that it wouldn’t be a surprise.
Having said that, and because of the very high overvaluation of the Swiss Franc, it is probable that it will weaken on an effective basis (versus a basket of currencies) in the next few months. One reason that additionally supports this idea has to do with funding rates in Switzerland. Not only it is the country with the lowest interest rate in the world, but also it stands