The Swiss National Bank took action against the appreciation of its currency by lowering interest rates and expanding banks' sight deposits in a surprise move.

Here are the highlights from the SNB release:

  • The Swiss National Bank (SNB) considers the Swiss franc to be massively overvalued at present.
  • This  current strength of the Swiss franc is threatening the development of the economy and increasing the downside risks to price stability in Switzerland.
  • Effective immediately, the SNB is aiming for a three-month Libor as close to zero as possible, narrowing the target range for the three-month Libor from 0.00-0.75% to0.00- 0.25%.
  • At the same time, it will very significantly increase the supply of liquidity to the Swiss franc money market over the next few days. It intends to expand banks' sight deposits at the SNB from currently around CHF 30 billion to CHF 80 billion.
  • The SNB is keeping a close watch on developments on the  foreign exchange market and will take further measures against the strength of the Swiss franc if necessary.

This is not a straight intervention in that the SNB did not go out and sell Swiss Francs against other currencies, but it is an attempt to loosen monetary policy to counteract the strong Franc within its domestic economy to try and help economic performance. Like the BOJ and Fed it now has adopted a zero interest rate policy (ZIRP).

The EUR/CHF rallied from a low of 1.0793 to 1.1147. It doesn't seem that traders and investors will stop buying the Swissy because of this move, as it continues to enjoy safe haven demand. We would need to see a reduction of risk around the sovereign debt situation. Stocks in Europe were mixed, with the main indexes in the UK, Germany and France down, but the ones in Spain and Italy rallying. We also see an easing of 10-year yields in Italy and Spain, meaning that the fear and selling of those periphery bonds we saw yesterday has paused.

The USD/CHF rallied from a low of 0.7625 overnight to 0.7787 before finding resistance (mainly at the 55-hourly ema). US S&P500 futures prices were off their lows form yesterday's plunge and market attention will be focused on the ISM Non-Manufacturing Index, due to be released at 10AM ET.

The SNB is warning that it will take further measures against the strength of the Franc if necessary, which may imply the willingness to do a straight intervention in currency markets.

Review Last Intervention from SNB:

The Swiss National Bank tried to use unilateral intervention in currency markets back in late 2009 and failed.

(click image for larger image)

  • In September 2009 through the middle of November 2009, the SNB attempted to defend the 1.5070 level in the EUR/CHF pair, but finally relented in December.
  • When the market saw that the SNB had stopped intervening we see the pair slide down to 1.4675 over the span of the next month and a half.
  • This led to a another attempt by the SNB to stem its currencies appreciation at 1.4615:

  • Once the SNB relented here again, we see a strong move downward over the span of a few weeks.

  • The SNB had a final attempt to stem its currencies accent at the 1.4315 and 1.49 level, after which it stopped its intervention completely and allowed market forces to take over.
  • Following that realization the market send the pair down to the 1.3050 area in the span of a month.

SNB Chooses Different Approach This Time Around

As we can see from this historical example the last attempt at intervention by the SNB was not successful as market participants wound up imposing a heavy cost on the SNB for its attempts, and the SNB was left holding the bag as it had accumulated EUR at higher prices.

Therefore we can see why the SNB has taken a different tact this time, instead trying to loosen monetary policy in order to help the economy cope with the stronger Franc and also lowering its rates can lower the interest rate differential between it and other safe havens (the US and Japan are already near zero) and widens out the differential between the ECB rate and the SNB rate. We will see if the expansion of monetary policy and lower rates deters traders and investors, but as along as sovereign debt fears remain in Europe the CHF will be sought out.

Therefore, we'll see if this is just stage 1 of the SNB plan, and if straight intervention is in the cards at a later date. They have signaled that further action may need to be taken, which can slow the amount of traders buying the CHF on fear of being caught on the wrong side of an intervention. However if the CHF inches back down to the lows from this week and breaks below without the SNB rearing its head, then we will have a battle between the market and the SNB until we reach a level at which the SNB decided it needs to do something. Stay tuned...

Nick Nasad
Chief Market Analyst