Swiss Franc at Two-Year Highs – What Will the SNB Do?

Too strong currency

The Swiss franc is becoming increasingly strong. In times of troubles on financial and geopolitical markets, investors turn to safe haven and the Swiss currency has been for years considered as such assets. The US-China trade war or economic slowdown in the European Union is triggering stressful reaction from investors that choose to change euro and buy Swiss francs prompting its exchange rate to rise even more against the euro. This week, Swiss franc reached the peak of two years. If other central banks decide to cut rates,  more inflow of capital will pump the Swiss franc even higher. Right now the interest rates in Switzerland are the lowest in the world – at minus 0.75%. Still rate cut in other parts of the world would make CHF one of the main beneficiaries.

What are the options?

The Swiss National Bank has a few options when it comes to handling the strong currency. It can just let it be and sacrifice the strong Swiss franc in the sake of holding on to inflation target. If it decide to intervene obviously buying foreign currencies is on the cards, but also cutting even further interest rate to a deeper negative area. This last move can be made as early as in September at the next SNB’s meeting.

To intervene or not, that is the question

So far, the well-known Swiss National Bank solution for too strong Swiss franc has been buying foreign currency – for instance the bank buy euros or dollars in intervention to make Swiss currency weaker. Nowadays the situation is not so obvious, as the policymakers in Switzerland are caught between two options. If they choose to let Swiss franc strengthen even more, their inflation target will be hard to achieve. If they decide to intervene by buying dollars, they risk dissatisfaction of the US administration. Why? In the US the FED bank is sailing towards interest rate cutting zone, the same situation in the euro-zone as the ECB prepares to cut rates. But the US Treasury is strongly against intervention and has already been accusing both Europe and China of keeping their currencies unfairly weak.  The US treasure has removed Switzerland from its watch list of manipulating currencies countries this May, though it may still come back there. The US sees Swiss trade surplus as one of its main target and Trump is very focused on monetary policies, which can mean that the SNB will not decide to make a very strong intervention on currencies market.

Deposits give signs…

Perhaps the SNB already has made some moves and stimulated the currency. Last week deposits at the Swiss National Bank were on the highest rise since 2017 which may suggest that the SNB sold Swiss francs to stop the currencies from further rallying against the euro. Analysts and economist are on the look for any signs that the central bank has been active on the currencies market. In the week ending on July 26 the amount of cash commercial banks park with the SNB reached CHF581.2 billion, more than CHF1.7 billion. It’s the biggest gain in more than two years.