Erste Group: Short Note Switzerland: Swiss Franc update

In the last few days, the franc has strengthened to EURCHF 1.48, implying that the “barrier” of EURCHF 1.50 no longer necessarily holds. In the past, when the exchange rate approached EURCHF 1.50, one could often notice a sudden substantial weakening of the franc, pointing to an intervention by the SNB. The bank has said since March that it would counteract further strengthening of the franc, while the wording at the last meeting mentioned “excessive” strengthening. Thus, the SNB might want to slightly tighten their policy via the franc, too (at their last meeting, a halt to the purchase of CHF bonds was decided, but these were only a small fraction of the additional measures). The Swiss economy has been doing quite well in comparison to other countries, such that the monetary policy support might no longer be needed to such a great extent, in the eyes of the SNB. In addition, the franc had weakened vs. the dollar lately, which attenuates the strengthening of the effective exchange rate. The SNB will continue to intervene, without a doubt (and seems to have intervened at EURCHF 1.49), but it is no longer clear what EURCHF level will be tolerated. The SNB might tolerate a quite slow and gradual strengthening of the franc in order to prepare its exit from the interventions. Markets had reacted to the strengthening, as has been reflected by a momentary increase in the implicit volatility. Based on that, market expectations of future exchange rate movements are between EURCHF 1.46 and 1.53 .