Swiss Franc (CHF) TODAY: Deutsche Bank consider the various options available to the keepers of the Swiss National Bank now that the European Central Bank (ECB) has announced an interest rate cut. The CHF exchange rate complex saw volatility over the past 24 hours moving in sympathy with the under-pressure Euro to which it is tied.
As we end the week we see the following:
- The euro to Swiss franc rate is quoted 0.03 pct lower at 1.2173.
- The pound sterling to Swiss franc exchange rate is 0.02 pct lower at 1.4990. At one stage the GBP/CHF powered ahead by 0.56 pct to reach 1.5102.
- The US dollar to Swiss franc exchange rate is 0.02 pct higher at 0.8916. The rate hit a high of 0.906 on Thursday.
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What did the ECB do?
The ECB has cut the refinancing rate to 0.15% from 0.25%. deposit rate to -0.1%. The EUR slipped lower on the news.
However, a massive slump occurred in the press conference that followed the decision; Draghi cautioned that risks to the Eurozone's economic growth potential remain to the downside.
The ECB says it will now consider purchasing simple and transparent asset-backed securities (ABS) - i.e quantitative easing. FX markets went into the meeting with the view that any talk of such measures would be the requisite trigger to sell the Euro further.
Swiss franc, the SNB and the ECB
Deutsche Bank analyst George Saravelos gives his opinions on possible SNB action:
Assuming the floor stays in place there are three possibilities:
1. Nothing. EUR/CHF is close to unchanged since the market started pricing more ECB easing. With the Swiss real estate market frothy and ongoing concerns around excessive mortgage lending, it is unclear whether more domestic easing will help fix what is largely imported disinflationary pressure.
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2. Follow the ECB. The problem with doing nothing is that the market is already pricing a rate cut. This has allowed implied EUR/CHF forwards to stay remarkably stable over the last few weeks: Swiss expectations can be broken down into about 10bps of cumulative SNB easing in H2 (similar to the ECB) and an additional 5bps widening in cross-currency basis reflecting expectations of liquidity injections.
3. Let EUR/CHF settle at the floor. The alternative to cutting rates would be to allow EUR/CHF to settle on the 1.20 floor and intervene. This would entail semi-permanent balance sheet expansion: by printing Swiss francs and using the proceeds to buy EUR and accumulate reserves.
Among these options, Saravelos believes the SNB would prefer the first option the most (do nothing), the third option the least (constantly intervene) and as a result be forced to settle on the second option by default (copy the ECB).
"We are thus left with a "chicken or the egg" problem whereby EUR/CHF is not on the floor in anticipation of central bank action, but the SNB may not see the urgency to act in its June 19th meeting in the absence of pressure on the floor," says Saravelos.
Euro exchange rate complex latest
The various PMI services indices this morning could have some EUR impact, but with the French and German indices only revisions, it is unlikely there will be a major deviation from the median.
"After the disappointing manufacturing PMIs, the risks are slightly on the downside, but don’t seem large enough for the EUR/USD lows in the 1.3586-8 area to be retested before the big ECB event tomorrow," say Lloyds Bank Research.
While yesterday’s Eurozone CPI data was nominally lower than expected, it was actually a little higher than some had feared at 0.5% following the much weaker than expected German CPI data on Monday, and with the 0.5% level not being a new low (replicating the March print) some see this as making it possible that the ECB don’t cut rates tomorrow.
"This is not our view (or the majority view) but suggests some scope for a further modest EUR recovery, though this will be easier if the PMI services data is more encouraging than the manufacturing indices," say Lloyds Bank.