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Swiss currency move: what the analysts say

Switzerland’s decision to peg the Swiss franc against the euro is a bold move, analysts say, but some warn that it will be expensive and may not succeed

Paul Mackel, senior foreign exchange strategist at HSBC

The Swiss National Bank’s move is somewhat sudden and aggressive. However, it needs to be aggressive to turn the tide for the Swiss franc (CHF) and to take the shine off its “safe haven” status. So, this is an endurance contest whereby the SNB needs to fight hard against a market that could soon test its resolve. Putting EUR-CHF at 1.20 today is the easy part. Keeping it there or significantly above will be difficult if the world still looks like a gloomy place.

The SNB has been down this road in the past back in October 1978 when a floor against the deutschmark was introduced. But this ultimately had undesirable consequences as inflation skyrocketed, reaching more than 7% in 1981. Not great for a central bank that is meant to be focused on price stability.

The Swiss authorities will remember the experiences of the late 1970s.

The problems the Swiss faced back then are somewhat similar to today. That is, the CHF strength back then was partly a function of lax US monetary policy and a weak US dollar – sound familiar?

The upward pressure on the CHF only started to fade when the US in particular started to fight back against inflation. This should serve as a reminder that if the Swiss go down the same path as before, their concern over the CHF will not truly dissipate until the world outside Switzerland looks like a better place. The past shows that there were high costs associated with a temporary move towards targeting the exchange rate.

Nick Beecroft, senior markets consultant at Saxo Bank

The SNB’s announcement that they intend to put a floor under EUR-CHF at 1.20 stands every chance of success.

Firstly, the CHF is massively overvalued and so the SNB cannot be said to be defending the undefensible.

Secondly, solid political support for the policy is now virtually guaranteed, given the acute pain that the strong CHF is inflicting upon Swiss exporters and the Swiss tourist industry. This will quash any repeat of the criticism that followed the SNB’s previous, loss-making, failed interventions at higher levels.

One final point – this move may be great for gold. Investors have potentially “lost” a major safe haven; and they’re still going to need them.

Clive Lennox, head of foreign exchange trading at Clear Currency

EUR/CHF is trading up 8.8%, almost a Richter scale measurement, such was the size of the tremor created by the Swiss National Bank decision to set a floor for the EUR-CHF rate at 1.20.

In what is a bold and potentially crippling move, the SNB has pitched up bearing all its artillery in what appears to be a last-ditch effort to shield the Swiss economy from excessive CHF appreciation.

Jeremy Cook, chief economist at currency brokers, World First

That was the single largest foreign exchange move I have ever seen. The Swiss franc has lost close on 9% in the past 15 minutes. This dwarfs moves seen post-Lehman brothers, 7/7, and other major geo-political events in the past decade.

The Swiss have had enough and have said today that they are willing to buy foreign currencies in “unlimited amounts”. This is intervention on a grand scale.

This turns up the heat on the eurozone and other economies who have benefitted from weakening their currency in the past couple of years.

Lee McDarby, head of dealing for the Corporate & Institutional Treasury desk at Investec Bank

The Swiss National Bank has committed to selling Swissie [the franc] up to 1.20 as a target level which it feels is still over-valued. It said it will enforce this rate at the utmost, thereby effectively putting a loose EUR-CHF peg in place and it has also taken the step of committing to buy foreign currencies in “unlimited amounts”. This is a massive turnaround in risk in the week when the market is already battling nervousness ahead of the ECB and MPC interest rate meetings this week. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds