How is the SNB going to react?

EUR/CHF Daily Chart February-October 2015

The FOMC meeting minutes for October published yesterday by the FED pushed the USD/CHF close to parity - a level that was not reached since March. After the FED emphasized the risks of a slowdown in global economic growth due to slower growth in China and other emerging markets in its September meeting, it dropped this sentence in their most recent statement. This suggests that the FED will focus again on domestic economic developments. Going forward the price sensitivity and volatility of the USD is expected to increase around the publication of important economic data as it will give guidance on the likelihood of a rate hike in December.

For Switzerland, the more important currency remains to be the Euro though which is increasingly under pressure again. At last week’s meeting, ECB President Mario Draghi surprised the markets once again by saying that not only an expansion of the QE program beyond 2016 could be an option to further stimulate the economy, but that a possible adjustment of the deposit rate is also being discussed. That additional information was sufficient to put pressure on the EUR/CHF. Interestingly the currency pair recovered quite quickly thereafter.

A recently published study by Deloitte suggests that two-thirds of Swiss CFOs think that an exchange rate of 1.10 EUR/CHF is acceptable for their companies. However the vast majority of CFOs sees an exchange rate of 1.05 as a “clear disadvantage”. Looking on the chart over the past few months we see that the pair was first trading during a consolidation period just below the level of 1.05 before it moved quickly just below the level of 1.10 – the new, unofficial target rate. This suggests that the SNB continues to intervene in the FX market to keep the currency pair close to the desired target rate and to absorb negative news from the Eurozone.

Whether these measures are sufficient to buy enough time until the next ECB meeting on December 3, remains unclear. In the recent past, Thomas Jordan and the SNB have surprised us already several times. If the pressure on the Euro stays high it would not be surprising if the SNB would use other tools, such as lowering interest rates into even more negative territory, before the next ordinary meeting of the SNB on December 10.

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