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Special report: Switzerland gives up on capping CHF against the euro

15 Jan 2015 13:32|Marcin Lipka

The completely unexpected SNB decision of on giving up on EUR/CHF maintenance above the level of 1.20. At the moment of the greatest tension, the franc cost almost 5 PLN, and though now it has dropped to the areas of 4.20 PLN, the chances for reaching the levels observed in recent time are small.

Where did this decision come from?

Throughout recent months the Swiss National Bank (SNB) repeatedly informed, that it will maintain the minimal exchange rate of EUR/CHF above the level of 1.20. This promise was also maintained by Bank's authorities just this year. So now there is a question, why this policy has been abandoned just now?

A certain answer is presented in SBN communicate, from which we can find out, that “divergence in monetary policy between the main currencies, has increased significantly, and this trend may be enforced”. It means that SNB foresees difficulties in fulfilling this promise related to the quantitative easing, which would be activated by the European Central Bank, thus they made an “ahead movement”. However, why have they sustained the above mentioned promise all this time?

It is not excluded, that they simply underestimated the market's forces. Probably the combination of speculation and real capital was inflowing with such a strong stream, that the only method of breaking this movement was setting the rate free.

Along with cutting EUR/CHF loose, the SNB decreased the deposit rate by another half percent, from minus 0.25% to 0.75%. Perhaps SNB expected, that such movement will cause the limiting of capital's inflow. It is doubtful, that the monetary authorities would expect currency's appreciation by 30% within the perspective of minutes.

The chart presents the rate of EUR/CHF from recent 10 years

Wykres - kurs EUR-CHF - ostatnie 10 lat

Source: Bloomberg. Drops of EUR/CHF rate means the enforcement of franc in relation to euro. There were moments, when CHF value was by 10% bigger, that the value of euro.

However, the last sentence of the statement seems to be a light in the tunnel. The SNB states that “if there will be such a necessity, the Bank will be active on the currency market in order to influence the monetary conditions”. It suggests, that if franc would get too enforced, the Swiss will intervene again. However, we do not know in what scale, and will SNB wait for EBC decision.

Consequences for zloty

It needs to be said that the SNB decision is negative for the national currency, and for the people, that are paying currency credits. Today in a certain moment, the Swiss currency cost almost 5 zloty, which means a depreciation of PLN in relation to CHF over 30%.

Currently the interbank market quotes the franc at 4.20 zloty. And though at this moment the situation is stabilized, this rate will not be stable when we will consider the intense course of movements. It can only be interpreted as a short term level of balance.

Chart of CHF/PLN from recent 10 years

Wykres - kurs PLN-CHF - ostatnie 10 lat

Source: Bloomberg. Increase of CHF/PLN means wearing off of zloty in relation to Swiss currency

As we marked in the general part the SNB left itself some space for further renewals of interventions on currency market. It increases the chances for moving EUR/CHF to the areas of 1.10, from 1.00. In such case CHF/PLN would drop below 4.00. However, when it comes to the return of franc in the areas of 3.50, it is currently very unlikely.

15 Jan 2015 13:32|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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