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The Swiss Franc Is Rallying, But Will the Central Bank Intervene?

Even the disapproval of the U.S. government may not be enough to prevent the Swiss National Bank from intervening in the currency market, according to strategists at MUFG Bank Ltd. and Commerzbank AG.

The Swiss franc reached its highest level since April 2017 against the euro on Tuesday after Washington put Switzerland back on its currency watch list and urged the country to adjust its macroeconomic policies. Yet strategists say Switzerland’s growth and inflation data could still encourage the SNB to buy foreign currency in an effort to curtail the franc’s advance.

“We know from the SNB’s intervention activity that the franc is already at critical levels, i.e. at levels at which it has intervened before last year,” said Thu Lan Nguyen, a strategist at Commerzbank. “There is a high likelihood that it will step into the market, or is already active.”

SNB data in August suggested the bank had pumped billions of francs into markets, buying foreign currency in an effort to curb the franc’s strength. A stronger franc can make it harder for Swiss companies to export their products.
The SNB said Tuesday that its interventions were designed only to offset the ill effects of too strong a currency. The interventions, which aren’t aimed at giving the nation a competitive advantage, are disclosed in an annual report, the SNB said in a statement.
Five years since the SNB jolted markets by scrapping a cap on the franc and introducing negative interest rates, the currency’s strength means there’s little chance it will be able to end the policy any time soon.
In the aftermath of the U.S. decision on Monday, traders are braced for swings in the franc in the weeks ahead. One-month implied volatility in the euro-franc pair rose to its highest in nearly two months on Wednesday, up by as much as 11bps to 4.27%. Meanwhile, Manuel Oliveri, a strategist at Credit Agricole SA, advises against chasing the franc higher.
The U.S. decision “encouraged market participants to test the SNB’s appetite to keep intervening to dampen Swiss franc strength,” said Lee Hardman, a strategist at MUFG Bank in London. “We still think the SNB will continue to intervene after the U.S. Treasury announcement, but it has created some additional uncertainty in the near-term which the market is testing now.”
The franc traded at 1.07517 per euro at 9:46 a.m. in London. The currency was up 0.2% against the dollar to 0.9658.
Here’s what strategists are saying:
Credit Agricole (Avoid chasing franc higher)
“We advise against chasing the CHF higher from current levels. The currency benefitted from the notion that the SNB was under pressure to turn less dovish on monetary policy, says strategist Manuel Oliveri.
“We see low risk for that to happen with current EUR/CHF levels potentially offering good risk reward for long-term longs.”
Societe Generale (Strong franc may become tougher challenge for SNB)
“We suggest that EUR/CHF moving below 1.10 might be the intervention trigger, making the SNB active again and raising U.S. scrutiny,” says strategist Olivier Korber.
“A strong CHF might thus become a tougher challenge for the SNB. The central bank now faces the risk of seeing markets testing its capacity to defend further appreciation. As the U.S. economy slows, the market’s appetite for safe havens looks set to grow. The JPY and CHF should be the main beneficiaries of these flows, mostly at the expense of the USD.”

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