Switzerland to Intervene on Overvalued Currencies?

Several analysts believe that Switzerland’s policymakers are more likely taking action to weaken the franc as the European Central Bank is looking to conduct further monetary loosening in the Eurozone.

In the past year, the Swiss National Bank has acted to prevent overvalued currencies from hitting the country’s exporters after its decision in January 2015 to stop implementing formal cap on its value against euro.

Currently, the central bank is having a hard time in containing the market turmoil which has driven investors to haven currencies like the Swiss franc, euro, as well as the yen.

In the past couple of months, the interventions of SNB in the forex markets and the “war of words” held the currency in check; thereby, leaving the franc mostly unchanged against the euro since the start of 2016. However, some analysts note that SNB Chairman Thomas Jordan recently considered a more aggressive action (as needed), which includes to the changes of the levels of exemption from negative interest rates for deposits at the central bank.

The European Central Bank will conduct a meeting next week amid the increased expectations that president Mario Draghi will be pushing the rates more negatively.

“The signal was a public indication the SNB is worried about the direction of EURCHF. This has put traders experienced with the SNB on high alert,” said Peter Rosenstreich, a market analyst for the online bank Swissquote.  He also said that the remarks of Mr. Jordan, along with the ongoing appreciation of Swiss Franc, have fueled speculations about certain intervention.

So far, the banks in Switzerland has stopped implementing negative interest rates on their ordinary customers as they fear that it might trigger withdrawals as their clients may opt to keep their savings in cash instead. On Monday, 10-year Swiss bond yield their all-time low of having only minus 0.45 per cent. As a result, banks increased interest rates on mortgages to be able to maintain profitability. However, more aggressive action from the SNB might upset the balance created by Swiss Banks.

G7 members, on the other hand, signed up to not intervene with the foreign markets, according to forex strategist Jane Foley from Rabobank.

“Switzerland has a very overvalued exchange rate, everyone knows that, so there are extraordinary circumstances by which they can intervene. They know that they can’t fend off haven status. All they are trying to do is to keep it stable and stop it strengthening at uncertain levels,” says Ms. Foley.

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