Analysis: More Swiss franc gains versus euro may push SNB to act

By Jessica Mortimer

LONDON (BestGrowthStock) – The Swiss franc could be poised to hit more record highs against the euro in the coming months, adding to the risk of the central bank intervening to curb franc gains despite its June pledge to stay away.

The Swiss franc has risen more than 10 percent versus the euro since the start of 2010, hitting a record high of 1.2848 francs per euro last week as concerns about global economic fragility drew safe-haven flows into the currency.

Analysts believe it could rise as high as 1.25 per euro.

The SNB intervened aggressively over a 15-month period ending in June, and SNB chairman Philipp Hildebrand has warned the bank would act if deflation risks resurface.

Policymakers will be mindful, however, that unilateral intervention is expensive and has limited impact when franc gains have resulted from external factors.

“The SNB will be in a difficult position when they next meet (on September 16) but I don’t think there’s much they can do about it, so I think 1.25 (in euro/Swiss franc) is where we are going,” said Chris Turner, head of currency strategy at ING.

“We’ve already seen massive intervention and it didn’t do anything more than delay the inevitable.”

The franc was trading around 1.3065 per euro on Monday.

If the SNB were to act, it may not be the only one. Japanese authorities have also expressed concern about the strength of the yen, another target for risk averse investors.


Positioning data from the Commodity Futures Trading Commission has shown speculators have ramped up bets in recent weeks that the Swiss franc will gain (IMM/FX: ). But net long franc positions are still below where they were in late 2009, suggesting that more gains are possible.

“Compared to previous episodes of Swiss franc appreciation, EUR/CHF shorts seem modest,” UBS currency analyst Beat Siegenthaler said in a note analyzing UBS’ own flow data.

“From a positioning point of view the pair has the potential to drop substantially … should franc-supportive global factors remain in place.”

One-month euro/Swiss franc risk-reversals — a measure of the premium required to hold a put or a call in a currency pair — also still show a bias for more franc upside.

Safe haven flows into the Swiss franc could also gain momentum if the Bank of Japan steps in before the SNB.

“The biggest push could be triggered if and when the Bank of Japan launches FX intervention to weaken the yen, as this would likely lead to safe-haven flows switching into Swiss francs,” said UBS’ Siegenthaler.

Charts show a significant jump since mid-August in the correlation between the euro/Swiss franc rate and U.S. equities (.SPX: ), demonstrating the franc’s sensitivity to risk aversion. Reuters data show the correlation has swung from a negative 0.85 in early May to a positive 0.86 in September.

“What is happening with EUR/CHF is a good indicator that the market fears contagion credit issues within the euro zone will be coming firmly back to the forefront of the agenda,” said Lee McDarby, corporate risk manager at Investec.


Recent strong data on the Swiss economy, including gross domestic product data for the second quarter, have increased the franc’s allure and suggested the economy may be well positioned to weather the impact of franc appreciation.

Worryingly for the SNB, however, weaker-than-forecast August CPI data highlighted the risk of deflation.

“Things are going in the right direction for the Swiss economy, but that could end if the franc rises further,” said Bank of New York Mellon currency strategist Neil Mellor.

He said the franc could go a lot higher, potentially to 1.20 per euro if the SNB does not step in, though he believes they will.

Swiss industry body Swissmem has already warned that the speed of the Swiss franc’s appreciation is a major concern for Switzerland’s manufacturing industry.

(Graphics by Scott Barber; Editing by Hugh Lawson)

Analysis: More Swiss franc gains versus euro may push SNB to act