Downside risks to EUR/CHF remain; ECB continues to be major risk for SNB

The Swiss National Bank had reduced the deposit rate to -0.75%. The central bank, against the backdrop of weak growth in price, hopes that the CHF will weaken overtime. Even if introducing negative rates has not resulted in considerably easing the franc, the central bank is unlikely to further ease its monetary policy. Additional reduction in interest rate will only trigger cash holdings and hence will have just a small expansionary effect, said Commerzbank in a research report.

Therefore, the central bank is left with FX market intervention. The central bank President Thomas Jordan has highlighted that the SNB will continue to be active on the FX market if needed. The development of FX reserves and sight deposits implies that the central bank continues to intervene in order to avoid the currency from appreciating against the EUR.

The strong uptrends in the currency pair of EUR/CHF before the high risks events such as the EU referendum in June imply that the SNB likes driving up the exchange rate before such events, noted Commerzbank.

With inflation in Switzerland expected to continue disappointing, there is a higher risk from the ECB deciding on stronger measures to weaken the euro. Furthermore, a likely vote of Brexit at the EU referendum also adds to a risk of franc’s appreciation.

The downside risks to EUR/CHF continue to be there, added Commerzbank. In the coming months, the euro is expected to remain under pressure against the CHF. Meanwhile, the central bank is not able to respond to developments of price in the country. Only with moderate interventions, the central bank will be able to avert a sharp appreciation of the CHF, according to Commerzbank.

“Higher EUR-CHF levels are only likely to become justified once an end is in sight to the ECB’s ultra-expansionary monetary policy. However, that is not likely to be the case before late 2017”, added Commerzbank.