One of the biggest market news stories of 2015 occurred in early January, when the Swiss National Bank decided it could no longer defend the CHF 1.20 per Euro peg. At the previous 11 December 2014 policy assessment meeting[i], it was announced that the SNB would be “…maintaining its minimum exchange rate of CHF 1.20 per euro, and is leaving the target range for the three-month Libor unchanged at 0.0–0.25%. Deflation risks have increased once again and the Swiss franc is still high. Consequently, the SNB will continue to enforce the minimum exchange rate with the utmost determination. It is prepared to buy foreign currency in unlimited quantities for this purpose…” However, the statement’s introductory paragraph concluded by noting, “…If required, the SNB will take further measures immediately…”
The ECB Governing Council had met just a week before that December. Its decision[ii] was to “…keep the key ECB interest rates unchanged…” but to begin “…purchasing covered bonds and asset-backed securities…” Up until this time, the SNB keep its schedule with the same precision as a Swiss watch. Hence, it must have been quite a surprise to markets when within seven days of the SNB December meeting it was announced that[iii] “…The Swiss National Bank (SNB) is imposing an interest rate of –0.25% on sight deposit account balances at the SNB, with the aim of taking the three-month Libor into negative territory. It is thus expanding the target range for the three-month Libor to –0.75% to 0.25% and extending it to its usual width of 1 percentage point. Negative interest will be levied on balances exceeding a given exemption threshold…”
The market must have certainly considered the intermeeting action as rare as an eclipse; however, within one month the SNB would eclipse that rarity. On 15 January, 2015, just one week before the ECB was scheduled to meet for the first time that year, the SNB announced[iv] that it was “…discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%. It is moving the target range for the three-month Libor further into negative territory, to between –1.25% and −0.25%, from the current range of between −0.75% and 0.25%…” The news media’s main focus was on the so called decoupling. However, it might have been the further 50 basis point reduction of the Sight Rate, to -0.75%, which indicated the depth of the crises. It was one less than a month from the December 25 basis point Sight Rate reduction to -0.25%.
There was no indication of any purchase target amount when the ECB announced a bond purchase program at the December 2014 meeting. At the January 22 ECB meeting the scale and scope of the expanded bond purchase program was announced[v]. “…the combined monthly purchases of public and private sector securities will amount to €60 billion…” It’s possible that the SNB had a rough idea as to the size of the program but might have overestimated potential effect on the Franc, thus the SNB was out in front of the ECB by a week. At the following ECB meeting of 5 March, 2015 it was announced that the bond purchases would commence “…on 9 March 2015…”
The chart demonstrates a sharp weakening of the Franc vs the Euro from about mid-July until about mid-August, just after the ECB July meeting, about 4.6%; from CHF 1.0419 to CHF 1.0899. If it were direct intervention, it might indicate that the SNB considered the ECB policy firmly set in place. Further it’s interesting to note that the Franc traded mostly in a channel, fitting Fibonacci retracement levels 38.2% and 23.6%; i.e., CHF 1.0789 support and CHF 1.0981 resistance.
At the 17 September SNB meeting[vi], policy remained unchanged and the reiteration that “…the Swiss franc is still significantly overvalued, despite a slight depreciation. The negative interest rates in Switzerland and the SNB’s willingness to intervene as required in the foreign exchange market make investments in Swiss francs less attractive; both of these factors serve to ease the pressure on the franc…”
It’s possible that the SNB was willing to defend the Franc within that range, with the stated goal of achieving CHF 1.20 per, at some point in the future. This may be indicated by the almost neutral reaction of the cross to the ECB’s further easing announcement in December[vii]. “…we decided to lower the interest rate on the deposit facility by 10 basis points to -0.30%… …we decided to extend the asset purchase programme (APP). The monthly purchases of €60 billion under the APP are now intended to run until the end of March 2017, or beyond, if necessary…” The cross did not react immediately, a slight strengthening, and then weakened beginning from the US Fed 18 December announcement of a base rate increase of 25 basis points, breaking resistance mid-January 2016 to its 52 weak low of CHF 1.115 per Euro. It’s likely that this move was US Dollar related as it was expected that the Fed had begun a rate increase cycle. Also, it’s not beyond reason to think that the SNB took advantage of the reaction to the Fed action, and intervened. The Franc weakened right through the January ECB meeting, at which ECB policy remained unchanged.
However, markets must have anticipated the ECB policy action for the upcoming 10 March meeting, at which it was announced[viii] that it was decided “…to lower the interest rate on the main refinancing operations of the Eurosystem by 5 basis points to 0.00% and the rate on the marginal lending facility by 5 basis points to 0.25%. The rate on the deposit facility was lowered by 10 basis points to -0.40%… …to expand the monthly purchases under our asset purchase programme from €60 billion at present to €80 billion…” It should be noted that the Franc hardly reacted, remaining either side of CHF 1.0915 per Euro.
At the SNB 17 March meeting, the SNB essentially reiterated its long standing policy and noted the continuing global slowdown[ix]. “…The complex structural changes taking place in China could have negative repercussions for global demand. In Europe, structural weaknesses and political uncertainty could hamper economic development…” In spite of the direct reference to Europe, the Franc remained steady vs the Euro.
The point of the narrative is that the relative values of the Franc vs the Euro seems to have stabilized as evidenced by the reaction of the cross to a weakening global economy and expanding ECB action; it clearly far less volatile than it was in the first quarter of 2015, to say the very least. Hence it’s reasonable to expect the Franc to remain within a range of CHF 1.0789 support through CHF 1.1119 resistance, or perhaps it may be said that the SNB will defend the Franc in this range.
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