The Swiss franc has come off of its lows versus the euro and the US dollar as Swiss interest rates have turned negative and the Swiss National Bank threatens a potential currency peg to the euro or a specific price target. This will be another attempt to stem the tide of a strengthening Swiss franc and potentially an opportunity to enter back into the EUR/CHF downtrend at better levels.
Two weeks ago the SNB unveiled a program to weaken the surging Swiss franc which it considers “massively overvalued”. The SNB is targeting a three-month Libor of 0.00-0.25% from 0.00-0.75%, effectively implementing a negative interest rate. The measures are designed to stem the flow of real money inflows and speculators betting on a rise in the value CHF. Negative interest rates are used to deter money managers seeking safe haven assets and short term deposits as a refuge. However, given the US credit rating downgrade and uncertainty in the euro zone, a negative interest rate may not be enough to deter real money inflows.
The SNB is now contemplating additional measures, including a temporary peg of the Swiss franc to the euro or a target exchange rate level as another attempt to stave off CHF appreciation. But a targeted exchange rate would require intervention by the SNB, something that the bank will want to shy away from after racking up $21 bn in paper losses from the intervention.
Should the SNB fail to implement further programs to weaken the CHF, a currency the OECD says is now 41% overvalued; the SNB could lose credibility in the market and be looked upon as a paper tiger. If the SNB implements a currency peg or a specific price (i.e. EUR/CHF 1.20), the initial market reaction may be for the CHF to sell-off, allowing speculators better levels at which to enter the long term trend. Following any appreciation in the pair there will likely be an attempt by the market and speculators to test the resolve of the SNB to hold the line in the sand. This will give traders a backstop as they know the most their position can go against them is the SNB price target.
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